Are Your Charitable Contributions Tax Deductible?
When it comes to filing your tax returns, your generous charitable contributions can benefit you, too. Deducting all or part of your donations can reduce your taxable income and reduce your taxes.
An estimated 54% of individual donations received a tax subsidy in 2018. With 2020’s temporary enhanced charitable deductions extended through this year, 2021’s percentage may even rise.
So, how can you increase your chances of enjoying the significant possible tax savings at filing time?
To understand whether or not your charitable contribution is tax-deductible, the qualifications, the limits of charitable deductions, and what’s different this year, read on.
What does the IRS consider a charitable contribution?
In the eyes of the IRS, not all donations are created equal. For your donation to be deductible, the recipient organization must have tax-exempt status.
Tax-exempt organizations generally include nonprofits that:
- Are religious, charitable, educational, scientific, or literary in purpose.
- Work to prevent cruelty to children or animals.
- Develop amateur sports.
But other organizations may be exempt as well.
These can include veterans groups, fraternal lodges, or governments, but not always. To be sure, you will need to check their status.
Here is a more specific list of organizations that qualify as charitable organizations and those that don’t:
Qualified
- Churches, mosques, temples, synagogues, and other religious organizations.
- Boy and Girl Scouts of America, Boys and Girls Clubs of America, Red Cross, CARE, Goodwill, Salvation Army, United Way.
- Fraternal orders if gifts are used for qualified charitable purposes.
- War veterans’ groups.
- Nonprofit schools, colleges, museums, hospitals, and organizations trying to find medical cures.
- Federal, state, and local governments, if gifts are solely for public purposes, including nonprofit volunteer fire departments and public parks facilities.
Nonqualified
- Country clubs, lodges, fraternal orders, and similar groups, unless they are a qualified charity.
- Civic leagues, social and sports clubs, labor unions, and chambers of commerce.
- Political organizations and candidates.
- Foreign organizations. Exceptions: Contributions to certain Canadian, Israeli, and Mexican charities are deductible. See IRS Pub. 526.
- Homeowners associations
If you are unsure whether an organization is eligible for deductible contributions, try entering the organization’s name and location into the IRS Tax Exempt Organization Search tool.
If the contribution also benefits you, this can limit the deductibility.
“Quid pro quo” contributions, or contributions made partly in return for goods or services, are only deductible up to the amount by which they exceed the fair market value of the benefit received.
For example, if you receive a gift valued at $40 in exchange for a $70 donation, your deduction will equal $30.
Also, the code explicitly excludes donations to, or for the benefit of, a college or university in exchange for athletic event tickets or seating rights.
And if you receive a credit against state or local taxes for your contribution, you must exclude the amount of the credit from your contribution amount.
Charitable events also present a quid pro quo challenge.
If you attend a charitable event, the same quid pro quo rule applies.
Your ticket price is only partially deductible. The deduction will be the total minus the fair market value of the right to attend the event.
This is true even if you did not attend the event. However, if you plan not to attend, you can return the ticket for resale and deduct the entire amount. So, keep this in mind if you cannot participate in a charitable event.
Non-cash contributions are a common way to donate.
Giving to charity does not always mean a cash payment.
Many organizations, like Goodwill, accept non-cash contributions. You may choose to donate volunteer services, a vehicle, gifts such as clothing or household items, or appreciated property such as stocks, real estate, art, or antiques.
These categories of deduction each have their own unique set of rules. For example:
- Used clothing or household items must be in good condition.
- Appreciated property is only deductible at its full fair market value after one year.
- How the recipient uses a gift impacts how much you can deduct.
These are the big caveats, but there are others. There are also specific additional regulations that determine the value of a donated vehicle.
Generally, the fair market value of the donated item will determine the deductible amount for non-cash contributions. Determining fair market value is complex, and there is no one formula, so the IRS’s Publication 561 is an excellent place to start learning more.
Alternatively, we can help you determine the value of your donations and whether something is deductible; contact us.
Is there a limit on charitable deductions?
As mentioned above, the extension through 2021 of charitable contribution incentives passed in last year’s Covid-19 relief legislation has expanded deductions and suspended certain limits.
In the past, if you wanted to deduct your charitable contributions, you had to itemize your deductions through Schedule A (Form 1040 or 1040-SR). The deduction for cash donations was generally limited to 60% of a taxpayer’s adjusted gross income (AGI).
Now, an above-the-line charitable contribution deduction of up to $300 is temporarily available for non-itemizers who take the standard deduction. Additionally, itemizers may currently deduct qualified contributions up to a complete 100% of their AGI.
There is good news for corporations, too: they will temporarily continue to deduct charitable gifts up to 25% of the corporation’s taxable income. (The previous cap was 10%.)
This raised ceiling applies to qualified cash donations only—non-cash contributions are ineligible and remain capped at 50% of AGI. For non-qualifying organizations, deductions remain limited to 30% of AGI.
How to deduct charitable contributions on your tax return
Those who do not itemize can deduct up to $300 of qualified contributions when calculating their 2021 AGI. For couples filing jointly, the provision doubles: up to $600 for a joint return.
If you itemize deductions, you must enter the amount of qualified contribution on Form 1040, Schedule A.
The increased AGI cap offers an opportunity for high-bracket taxpayers, who may wish to utilize the expanded deductions for more significant savings by making any planned 2022 contributions this year instead.
With or without the expanded deductions, one thing is essential in any year: record-keeping. The IRS has substantiation and disclosure requirements for the deduction of any contribution of any size.
That means bank records and written communications or tax receipts from the donees.
For cash or property donations worth more than $250, you’ll need to receive a letter of acknowledgment from the organization by the date you file your taxes.
The letter must include the amount donated and an estimate of the value of any goods or services you received. If you are planning to deduct $500 or more in non-cash donations, fill out Form 8283. If the donated items are worth more than $5,000, you’ll need to attach an appraisal.
You can find additional information on substantiation in IRS Publication 1771.
In closing…
To learn more about deducting charitable contributions and for specific guidance, refer to IRS Publication 526. The key things to keep in mind are that donations should go to qualified organizations; you will only deduct the fair market value of your contribution, and you must keep excellent records.
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