What is a charitable contribution deduction?
A charitable deduction is one of the itemized deductions available to taxpayers who donate to charity. The charitable deduction allows taxpayers to deduct all contributions to charitable contributions of cash and qualifying property within certain limits. These deductions must be listed in Schedule A of 1040.
A breakdown of charitable contribution deductions.
The charitable contribution deduction allows taxpayers to make large charitable donations and take advantage of substantial tax deductions for the year the donation is made. The rules for deducting these donations can be complicated in some cases.
In order to deduct charitable contributions, the receiving charity must be a qualified organization in accordance with Section 170(c) of the IRC (Internal Revenue Code). Some of the acceptable charities include:
A civil protection organization established in accordance with local, state, or federal law, including unreimbursed expenses for civil protection volunteers that are directly related to its volunteer services.
A non-profit cemetery, but only if the funds are dedicated to the perpetual upkeep of the cemetery and are not used to fund a particular tombstone, mausoleum crypt, or other indicators.
A synagogue, church, mosque, or other religious organization.
A trust, community trust, or foundation established in the United States, organized and operated solely for scientific, religious, charitable, literary, or scientific purposes.
A voluntary, non-profit fire company.
American organization designed to prevent cruelty to animals or children.
A domestic fraternal enterprise that operates in a lodge system. However, a donation for this type of organization is only deductible if the contribution provided is used exclusively for community promotion or other charitable purposes.
An organization of veterans.
Limitation Deduction Limits
The IRS limits the total amount of charitable contributions that may be tax-deductible in any given year, typically 50% of the taxpayer's adjusted gross income. This is true for most charities that receive donations, including all public charities, all private operating foundations, and some private foundations that distribute received grants to public charities and operating private foundations within two and half months after the year the donation was received. A 30% cap is required for contributions to certain veterans organizations, fraternity groups, and cemeteries.
The CARES act temporarily suspends the limit on donations for 2020 and beyond.
The Coronavirus Aid, Relief and Economic Security Act (CARES), a bipartisan bill passed in March 2020, includes some changes to the rules for charitable contributions made in 2020. These rules have been extended until 2021:
Allows non-discriminatory taxpayers a deduction of $300 for charitable donations.
Increase the limit on the amount a donor can give to public charities and certain foundations in a single year. This year, donors can fully deduct contributions up to 100% of their adjusted gross income or AGI. Under the Tax Cuts and Jobs Act (TCJA), which came into effect in 2018, the limit was set at 60 percent, an increase from the previous limit of 50 percent.
New for 2021 is an additional "above the line" deduction for joint depositors. Allows non-discriminatory taxpayers a deduction of $600 for charitable donations in cash or jointly filed taxes.
Otherwise, to split charitable donations when you file in 2021, you must have enough deductions, charitable and otherwise, to exceed the standard deduction.
Standard deduction amounts
The 60% donation limit would apply to most cash contributions regardless of the donor's adjusted gross income in a normal fiscal year. Still, the lower limits would apply to other types of contributions as well. For example, non-cash contributions such as clothing and appliances are limited to 50% of adjusted gross income. Real estate gains at fair market value cannot exceed 30% of adjusted gross income, and the same generally applies to donations to a private foundation. The other types of donations reach a maximum of 20% of the adjusted gross income. Contributions in excess of these limits can be carried forward on future tax returns for up to five years.
How the deduction is claimed
Most people, of course, don't give more than 20% of their adjusted gross income. But if all of your tax deductions combined add up to the standard deduction, it's worth breaking them down as it can lower your tax. You have to exceed the standard deduction. Otherwise, it will be questionable.
Itemizing the deductions involves completing Schedule A of the federal Form 1040, with the charitable deductions recorded in the "Gifts to Charity" section, lines 11-14. The number from line 17 of Schedule A is then transferred to line 9 of Form 1040.
Other allowable deductions include medical and dental bills, state and local taxes, property and personal taxes, points of interest and mortgage, mortgage insurance premiums, investment interest, and accidental losses and theft following a declared federal disaster.
If these and other allowable deductions amount to the standard deduction, take advantage of it.
Rules for claiming the deduction
It must be a qualified organization: Charitable donations must be made to 501(c)3 tax-exempt organizations to be eligible for a deduction.
A legit charity will be happy to provide proof of your tax-exempt status, for example, by filling out Form 990. But be careful not to be fooled by scammers. You may get a call from someone saying, "We started this to benefit the earthquake victims." Request for proof of its tax-exempt request. It's an easy way to make sure that scammers don't come to deceive you into believing it is a great charity.
In some cases, even legitimate causes are not eligible for a charitable donation. For example, donations of money through GoFundMe and other platforms commonly used for fundraising efforts are not tax-deductible.
The IRS also offers a tool, the Tax-Free Organizations Survey, where you can confirm the status of a non-taxable organization.
The IRS considers the following types of organizations eligible for tax-deductible donations:
Churches, synagogues, temples, mosques, and other religious organizations.
Federal, state, and local governments for contributions to the public good.
Groups of veterans.
Organizations such as the Salvation Army, American Red Cross, Goodwill Industries, and United Way.
Schools and non-profit hospitals.
You must document your charitable contributions.
The Internal Revenue Service (IRS) requires you to track your cash contributions (your bank statement will suffice) and your payroll deductions. If you donate $250 or more, the charity will usually send you written confirmation of the amount you donated before completing the return form. Make sure to ask for it if you don't receive it.
If you donate cash under $500, you must obtain receipts from the organization to prove your donation. Charities like Goodwill Industries often provide a form with your name and address where you can list the items given and the date on which they were given. The IRS requires that donated items be in good condition; this rule is intended to prevent donors from donating valuables and exaggerating their value in order to inflate the amount of the deduction on their tax returns.
Non-cash contributions over $500 require that Form 8283 be completed and attached to the return. A qualified organization must appraise any property valued over $5,000. The host organization usually provides an assessment. If you donate art to a museum, the museum can help you get a qualified appraisal for your art.
Keep a copy of all of your receipts if the IRS calls you to verify the charitable deductions you are claiming on your federal income tax return.
Expenses for volunteer efforts matter
While you will not receive a deduction for the amount of your time or services when you volunteer, any purchases made for the benefit of an organization can be deducted if they are not reimbursed. Keep track of the items you purchase for your non-profit and income organizations.
Likewise, the actual costs of oil and gas may be deducted for activities such as trips to a charity event or donation location. Or you can deduct the standard mileage, which has been 14 cents per mile for many years.
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