Aug 20, 2020 Maximizing the Tax Benefits of your Charity
There are several misconceptions regarding the tax benefits of charitable giving, some of them specifically pertaining to US citizens living in Israel. We hope that the below Q&A, along with our video, clears up any confusion and allows you to maximize your deductions.
Q: Can you deduct both US and Israeli charity in both countries?
A: Yes! Due to the tax treaty between the US and Israel, you can get a tax benefit in both countries. You can deduct Israeli (Seif 46 Aleph) contributions in the US, as long as those contributions do not exceed 25% of your Israeli-sourced adjusted gross income. On the flip side, you can deduct American (501(c)(3)) contributions in Israel as long as they do not exceed 25% of the US income that you are declaring in Israel.
Q: How does charity reduce your US taxes?
A: If you itemized your deductions (rather than claiming the standard deduction), your charity will reduce your adjusted gross income (AGI) dollar for dollar. You can deduct up to 60% of your AGI, with any excess charitable deduction carrying forward for 5 years. For the 2020 tax year only, you can deduct up to 100% of your AGI. Note that these limitations are different if donating appreciated stock or via a donor advised fund.
Q: Can you deduct charity in the US if you take the standard deduction?
A: Starting on the 2020 tax return you can deduct up to $300 of charity, even if you do not itemize.
Q: How does charity reduce your Israeli taxes?
A: For every shekel you donate, you receive an actual tax credit of 35 agurot. In other words, 35% of the charity you give will be a refundable credit on your Israeli tax return. Limits will apply if you give more than 30% of your income or over 9,350,000 NIS in one year, with the excess charity carrying over to a future year.
Q: Should you donate to Israeli or US charities?
A: As a general rule, you should donate in the country where you have income. If you have both Israeli & US source income, either can work. Keep in mind that if you rely on all of your Israeli taxes paid as a credit against US taxes, giving charity in Israel will give you a tax refund in Israel, which could potentially lead to a greater US tax liability.
Bottom line: Save those receipts! They may help you more than you realize. When filing in Israel you will need the actual physical receipts, so don’t just scan and toss them!