Lawyers are a charitable bunch. The American Bar Association recommends that every lawyer aspire to at least 50 hours of pro bono service each year. While I’m not aware of any way you can deduct from your taxes the time associated with pro bono work, there are a lot of tax benefits that come with charitable giving. Even more importantly, many lawyers fail to take legitimate deductions each year because they’re not familiar with what is and what isn’t acceptable to record as a donation.
Charitable donations can both help your favorite cause and at the same time give you a tax benefit. If you’re in the 33% federal tax bracket, a donation of $1,000 reduces your taxes by $333.
Unfortunately, charitable donations are not deductible if you claim the standard deduction (since charitable donations are a below-the-line deduction). You’ve probably taken the standard deduction each year all the way through law school. As you start to make more money or get married, particularly if you live in a state with high income taxes or if you own a home, you may begin to itemize your deductions on Schedule A.
If you itemize deductions, all charitable donations are going to reduce your taxable income and therefore result in savings on your tax bill. This means it becomes important to track your charitable donations throughout the year.
Of course, most people recognize cash donations and keep track of them. I have a folder on my computer called Taxes and subfolders for each calendar year. When either or my wife makes a charitable donation, I simply save a PDF of the donation receipt in that folder. When it’s time to do my taxes, it’s pretty easy to consult that folder and count everything up.
It’s the non-cash donations that are harder to track and that I think a lot of lawyers are leaving on the table.
For example, every year we donate several bags of clothing and household items to Goodwill. It’s a natural extension of living in a small city apartment. You can only keep so much stuff which means we’re always willing to get rid of things we’re not using.
Those Goodwill donations are deductible each year. At a marginal rate of over 40%, for each $1 worth of clothes or goods that I donate to Goodwill, I save $0.40. That adds up over time, you just need to make sure you keep track of it.
For charitable donations, Turbotax has a free online program called ItsDeductible that you can use throughout the year to keep track of your donations. They’ve made it as about as painless as possible. You do have to go through the trouble of recording each donated item and assessing its value but if you’re anything like me, you’ll be glad for the several hundred dollars you receive in the Spring when you file your taxes.
Once you start to recognize the value of the charitable donation, you’ll also start to realize that often it’s easy and nearly the same deal to donate something rather than to go with the trouble of listing it and selling it online. If you can get an instant 40% tax write-off, the work associated with the item you’re selling may not be worth as much as you think.
It also makes you a magnet for charitable donations. Recently my firm replaced my laptop after the old one died. The IT department’s first question was whether I had any data saved on the hard drive. My first question was whether they’d give me the dead computer so I could donate it to my favorite charity.
Other than cash and clothes/goods, what other items or services count as charitable donations?
I’ve already written about how you can donate appreciated stock to a charity. This is a double win for both you and the charity. The charity receives the full value of the donation. You get to write off the full value of the donation. Neither party pays the capital gain taxes associated with the stock. In other words, if you have $100 in stock and $100 in cash, you can donate the $100 in stock to the charity (and take the $100 deduction) and then use the $100 of cash to repurchase the same stock, thus resetting your cost basis and completely avoiding any taxes associated with the capital gain of that stock. It’s a great way to flush out capital gains if you were planning on making the donation anyway.
There are also tons of other charitable donations you might be missing. Do you volunteer for the Boy Scouts or some other charitable organization? How about a Legal Services Corporation? If you work without pay for those organizations, you can deduct as a charitable contribution your unreimbursed expenses in providing the services. This includes things like commuting expenses to and from the organization’s place of operation and meals and lodging on a trip away from home for the organization.
Take for example the commuting expenses. If you drive back and forth between your volunteer work at a Legal Services Corporation, you can deduct the actual vehicle operating expenses (i.e. gas, oil, etc.) that are directly related to your volunteer services or you can claim a flat mileage rate of 14 cents per mile. If your charitable organization is 10 miles away (20 miles roundtrip) and you go twice a week, that’s a $291.20 donation you’re making each year that you should be tracking (plus tolls and parking).
There are plenty of other charitable donations you may be missing, such as:
- Dues paid to a qualified tax-exempt organization to the extent they exceed the value of benefits from the organization (i.e. monthly journal, right to attend lectures, etc.)
- Benefit tickets to theater events, concerts, lectures that are sold by charitable organizations at prices higher than the regular admission charge (the difference between the regular cost and the amount you paid is the charitable donation).
- Costs of telephone calls or materials/supplier you furnished to an organization in the course of uncompensated work for a qualified charity.
The key thing to remember is that there are donation opportunities everywhere and, if you’re itemizing your deductions, those have real value to you. As such, you should develop a way to track them. This is one of the reason why people say that you save most of your money on taxes throughout the year and not at tax time. Add a log book to your car and start making a note each day you drive to/from that volunteer opportunity. Or start a folder on your computer for charitable receipts and start saving them throughout the year.
I should probably close by saying that this isn’t a comprehensive article on charitable giving (you’d need a book for that and I’d suggest J.K. Lasser’s Guide). You’ll need to document each charitable gift and do some research to make sure it is in fact appropriate to include on your Schedule A each year. But this isn’t as hard as it sounds. Chances are good that you do the same thing every year (like us donating used items to Goodwill). You don’t need to know every charitable donation in the book. You just need to know if what you’re doing can reduce your taxes. If it can, start recording it. You’ll get better over time and end up with a lot more extra cash each Spring.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.