Tax efficiency is a central goal of any financial plan. Cash donations to worthy causes may allow you to combine good deeds with smart tax planning. For tax purposes, cash donations must be itemized. To take full advantage of the cash donation deduction, you must first familiarize yourself with basic tax law.
Your cash donations may qualify as tax-deductible items, which are separate and distinct from tax credits. A tax credit reduces your tax bill on a dollar-for-dollar basis. A tax deduction simply lowers your taxable income, from which your tax bill is ultimately calculated.
As a taxpayer, you have the choice of taking either your standard deduction or using itemized deductions to reduce your taxable income. As of 2010, standard deductions are listed as $5,700, $8,350, and $11,400 for single, head of household and married filing jointly taxpayers, respectively. For itemizing to make economic sense, your itemized deductions must exceed the applicable standard deduction.
It is unlikely that you will choose to donate several thousands of dollars to try to make your itemized deductions exceed the standard deduction. As part of your tax planning, you must therefore identify all other expenses that may be itemized. Besides cash donations, you can itemize mortgage interest, property taxes, state taxes and unreimbursed employee expenses.
You can itemize donations made to religious, educational, scientific, literary and charitable organizations. At tax season, each recipient should provide you with a statement that documents your donations. Statements should include the name of the recipient organization along with the amount and date of the contribution.
You can total up your cash donations and enter them on the Internal Revenue Service's Schedule A for itemizing. Special rules apply if you make an individual donation that is at least $250. You will need to present a written acknowledgment of the amount of cash and show that you received no tangible benefit from the donation. For instance, a religious group may indicate that the benefits of your gifts to the church will provide intangible benefits.
Limits apply to the type and amount of cash donations that can be itemized as deductions. You cannot itemize political contributions, fraternity dues and donations to foreign organizations and lobbyists. In terms of amount, your itemized cash donations will be limited if they exceed more than 30 percent of your adjusted gross income.
Beyond cash gifts, you may also trigger the alternative minimum tax (AMT) through your itemized deductions. The AMT limits the amount of itemized deductions available for those with high incomes and requires these taxpayers to pay a certain amount in federal taxes. To determine whether you are subject to the AMT, you should complete a special worksheet within the IRS Form 1040's instructional booklet.