It’s better to give than to receive.
We’ve all heard the phrase.
As a bonus, the US tax code allows you to receive when you give, in the form of tax deductions that can lower your tax bill.
And today, we’re going to be going over everything you need to know about tax deductible donations.
We’ll be covering what types of donations are eligible, how to claim your deduction, if it even makes sense for you to donate for tax purposes… and everything in between.
Note that for guidance or advice specific to your situation, you should consult with your tax or legal professional.
Let’s get started!
What Organizations Are Eligible For Deductions?
Only donations that go to a tax-exempt organization or qualified organizations qualify for a tax deduction.
So, friends and family unfortunately do not qualify for a tax deductible donation.
But Section 501(c)(3) of the IRS rules clarifies this in detail and examples of qualified entities include:
- religious organizations,
- charities like Goodwill and the salvation Army,
- nonprofit schools,
- hospitals and volunteer fire departments,
- and public parks
…to name a few.
Most, but not all, charitable organizations qualify for a charitable contribution deduction.
If you’re not sure if the organization you want to donate to is tax-exempt, the IRS has an easy to use Tax Exempt Search tool that can help you verify their status.
What Kinds of Goods are Considered as Tax Deductible Donations?
In general, cash contributions, as well as items donated, are tax deductible.
Common non-cash donations tend to be clothing and household items like furniture but other everyday items such as laptops, cars, and even houses can also be donated.
But pay attention to the condition of the items you give.
The IRS only permits deductions for clothing and household donations that are in “good used condition or better”.
Note that the rules for non-cash donations are a bit more strict but we’ll go over those later in the post.
One tax deduction that is often overlooked is tax deductions for volunteering.
When you volunteer, your time is not deductible, but non-personal, living, or family-related expenses are.
Think of it as mileage to and from volunteer locations.
Tax Deductible Donations: Limits & Value
While you can donate until you drop, Uncle Sam puts a cap on how much of a deduction you can take per tax year based on your donations.
In general, you cannot exceed 60% of your adjusted gross income.
In some cases, limits of 20%, 30% or 50% may apply for contributions to specific private funds and veterans organizations to name a few.
If your contributions exceed the limit, you can generally carry the excess over for the next five years.
For the 2020 tax year, the CARES Act eliminated the 60% limit for cash donations to public charities and you can deduct up to $300, even if you take the standard deduction.
Note that some donations, such as donations for where you receive at least partial economic benefit, don’t get 100% credit.
An example of this would be buying a coffee mug or charity dinner to support a cause.
Only what you contributed in excess of the value of the item is deductible.
If you donated $50 and the value of the coffee mug is $30, the deductible amount of the coffee mug is only $20.
Also, be aware that for non-cash items, you must claim the fair market value of the item and not what it is worth to you.
How Do You Claim Tax Deductible Donations?
To claim tax deductible donations, you will have to itemize on your tax return by filing Schedule A of IRS Form 1040 or 1040-SR.
If you are not familiar with itemizing, there are two ways you can take deductions on your federal income tax return:
- you can itemize deductions (meaning list out every single deduction you want to take), or
- use the standard deduction (a set amount of deductions provided to most taxpayers
But does it make sense to itemize?
Itemizing can take a lot more time than taking the standard deduction, but the decision ultimately depends on which deduction type provides the greatest reduction in your tax.
A tax professional like the team here at LYFE Accounting will be able to help you decide what is best for you.
In general, you should itemize deductions if your allowable itemized deductions are greater than your standard deduction.
Or, if you must itemize deductions because you can’t use the standard deduction.
Most taxpayers will be better off simply taking the standard deduction of $12,400 for single filers.
Or, $24,800 for married couples filing jointly as the standard deduction will provide them with the least amount of tax liability.
Here are the standard deductions based on your filing status as a reminder:
Things to Remember When You Choose to Itemize
If you do decide that itemizing is best for you, here are a few extra things to remember:
1. Contributions are deductible in the year it is paid.
A check in the mail to the charity or a charge to your credit card constitutes payment, even if payment is made in a later year.
2. You will need to keep very good records related to your contributions to verify that you gave.
No matter the value, be sure to keep up with receipts, bank statements, canceled checks, or written acknowledgments.
Not only for your own records but in case you were to get audited by the IRS.
3. Keep up with any carryforwards that you have made.
Remember, any contributions that exceed the limit can generally be carried over for the next five years. You want to make sure they are used before they expire.
Well, there you have it, everything you need to know about tax deductible donations.
As a recap, here are the key takeaways you need to know:
1. Only donations that go to a tax-exempt organization or qualified organizations qualify for a tax deduction.
2. In general, cash contributions as well as items donated are tax deductible but don’t forget tax deductions for volunteering.
3. In general, you cannot exceed 60% of your adjusted gross income.
But for the 2020 tax year, the CARES Act eliminated the 60% limit for cash donations to public charities and you can deduct up to $300, even if you take the standard deduction.
4. For donations where you receive at least partial economic benefit, only what you contributed in excess of the value of the item is deductible.
5. To claim tax deductible donations, you will have to itemize on your tax return by filing Schedule A of IRS Form 1040 or 1040-SR.
6. You should itemize only if itemizing provides the greatest reduction in your tax.
7. Lastly, if you do decide to itemize, be sure to keep up with donation records in case of an audit.
And if ever you need help with your business taxes, or if you want to save more on your tax liability as an individual, don’t hesitate to contact us.
We also offer other financial solutions such as accounting, bookkeeping, CFO, and consultancy services. Contact us today at 470-240-1437!