The Tax Advantages of Donations to Charity

Donating to a charity can provide you with a generous tax deduction.Jupiterimages/Comstock/Getty Images

Besides the good feeling you get from donating to charities, the Internal Revenue Service rewards your generosity with tax breaks. In many cases, donating to a charity can significantly reduce your income tax liability. To write off a charitable donation on your taxes, the receiving organization must be a qualifying tax-exempt organization.

Federal Income Tax Deduction

The IRS allows you to take a deduction on your personal tax return for money or the value of goods donated to a charity. The donation must be reported as an itemized deduction, meaning you cannot take the standard deduction that year and you must file your taxes using federal Form 1040 and Schedule A. The amount of your donation decreases your taxable income, which in turn reduces the taxes you owe. The value of the deduction depends on your tax bracket. For example, if you are in the 35 percent tax bracket, a $5,000 donation will save you $1,750; if you are in the 15 percent tax bracket, that same $5,000 deduction will only save you $750.

If you donate property that has appreciated in value, such as stock holdings or real estate, you can deduct the fair market value rather than what you paid for the asset. You must have held the property for at least one year to qualify as a long-term capital gain. For example, if you purchased 300 shares of a stock two years ago for $3,000 and the shares today are valued at $10,000, you would have to pay capital gain tax on the $7,000 profit when you sell the stock. If you give the stock to a qualifying charity, you can claim a $10,000 donation and avoid the capital gains tax altogether.

When you deduct a charitable donation on your federal income tax return, it decreases the amount of taxable income on your state return as well. Even if you do not itemize your deductions on your federal return, some states allow you to claim a deduction for charitable donations on your state return. For example, in North Carolina, the state department of revenue allows people who do not itemize on their federal return to claim a tax credit for 7 percent of the amount donated minus 2 percent of your adjusted gross income reported on your federal tax return.