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Tips For Tax Deduction On Donations

Tips For Tax Deduction On Donations

This tax season may just be the last time many Americans post their tax returns and receive a discount for charitable giving.

Under federal (and state) law, charitable contributions to 501 (c) (3) from public charities or private foundations may qualify you for a charitable tax deduction. Because each deduction serves to decrease your overall taxable income and, in turn, your tax rate, multiple deductions usually mean a reduction in your tax account.

Charitable deductions are an incentive for giving, allowing you to make the world a better place by lowering taxes. For many people, donating to qualified charities becomes much easier on their finances once they learn about charitable deductions.


Tips for Claiming a Tax Deduction with Charitable Donations

If you are donating to a qualified organization (or planning to do so), it is essential to be well informed before you begin the tax preparation process. As with any part of paying taxes, you must follow specific rules to claim the deduction properly. We advise you to consult your professional tax advisor for advice on your tax situation and how charitable giving can be of particular benefit to you.

Here are some quick tips for applying a tax deduction for contributions to qualifying charities:


1. Remember that you will probably need to list your deductions.

When completing your taxes, you have the option to accept the standard deduction or list the deductions. Your donations will only affect the amount you pay in taxes if you follow the detailed deduction path.

You would generally choose to discriminate only if you expected the total amount of your combined deductions to exceed the standard deduction. Otherwise, it is usually recommended to take the standard deduction.

For fiscal year 2021, the standard deductions are as follows:

  • Individual: $12,500

  • Joint declaration of marriage: $25,100 

  • Household: $18,800

Ensure to gather a record of all your contributions throughout the year to get a clear idea of which option is suitable for you.

Note: For 2020 taxes, specific additional benefits are available for cash contributions. The annual cash donation limit has been increased for fiscal 2020. If you don't choose itemized deductions, you can still claim a deduction of up to $300 in cash donations (added to claiming the regular deduction). This amendment is the result of the CARES Act, with more details available on the IRS website.


2. Be abreast of the limits of the donation deduction.

The Internal Revenue Service (IRS) places specific restrictions on the total dollar amount you can claim to deduct your charitable contribution. In most cases, taxpayers can deduct a certain percentage of their adjusted gross income (AGI) through an itemized deduction for cash donations. The deduction is generally limited to 60% of the individual's adjusted gross income.

This limitation does not cover specific eligible contributions. To learn more about how charitable donation limits can affect your tax return, talk to an accountant.

Note: The IRS has temporarily stopped the limits on charitable contributions under the CARES Act.


3. When submitting your tax return, be prepared with the appropriate information and documentation for your donation.

Surprisingly, the tax law presents some simple rules for requesting a tax-deductible donation. These rules are implemented to reduce fraud while encouraging donations to charities of your choice.

Here are the basic steps you need to take to claim the charitable deduction:

  • First, make sure the charity you are contributing to is a qualified non-profit organisation. It must be a private foundation or a 501 (c) (3) public charity. These details should be available on the organization's website or provided openly during a donation request.

  • Keep a record of your donation. Usually, the recipient organization will provide a tax receipt or other type of document for tax purposes. Any contribution over $250 (gifts of cash or property) must have written confirmation from the recipient charity describing the total amount of the donation, whether the taxpayer received any goods or services in return, and the fair market value of all goods/services provided.

  • For some cashless gifts, such as real estate, it may be necessary to obtain a qualified appraisal to determine fair market value.

  • When filing taxes, keep documentation handy. You can expect to enter certain dollar amounts and other details.


4. Be aware of changes in tax law each year.

In some situations, minor changes can be made to specific tax regulations. Therefore, it is essential to know the most recent tax information (and the tax implications of any adjustment). The Internal Revenue Service (IRS) offers up-to-date information on charitable contribution deduction rules on its website, and you can also consult a professional tax preparer.


FOR MORE INFORMATION ON HOW JAMES FINANCIAL SERVICES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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