Charitable contributions can lower your taxable income, as well as your tax bill. To get the full benefit, however, your donations to charity and other itemized tax deductions must exceed the standard deduction amount for your tax filing status.
The tax law that took effect in 2018 nearly doubled the standard deduction and limited the state and local tax deduction, making it harder for taxpayers to itemize.
“If you don’t itemize, you won’t be able to deduct your charitable giving,” says Steve Parrish, co-director of the New York Life Center for Retirement Income at The American College of Financial Services.
CARES Act temporarily suspends donations cap for 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, a bipartisan bill passed in March, includes a couple of rule changes for charitable contributions made in 2020:
- It lifts the cap on how much a donor can give to public charities and certain foundations in a single year. This year, donors can fully deduct contributions equal to up to 100 percent of their adjusted gross income, or AGI. Under the Tax Cuts and Jobs Act that took effect in 2018, the cap was set at 60 percent, a bump up from the previous limit of 50 percent.
- It allows taxpayers who do not itemize a $300 deduction for charitable giving.
Otherwise, in order to itemize charitable contributions when you file in 2021, you must have enough deductions, charitable and otherwise, to exceed your standard deduction.
Standard deduction amounts
|2020 tax year||2021 tax year|
|Married couples filing jointly||$24,800||$25,100|
|Heads of households||$18,650||$18,800|
In a normal tax year, the 60 percent donations cap would apply to most cash contributions, regardless of the donor’s AGI, but lower limits would apply to other types of contributions. For example, non-cash contributions, such as clothing and appliances are limited to 50 percent of AGI. Capital gain property donated at fair market value can’t exceed 30 percent of AGI, and the same is generally true of donations to a private foundation. Other types of donations max out at 20 percent of AGI. Contribution amounts in excess of these limits can be carried forward on future tax returns for up to five years.
How to claim the deduction
Most people, of course, don’t donate more than 20 percent of their adjusted gross income. But if all your tax deductions combined add up to more than your standard deduction amount, it pays to itemize as you will be able to lower your tax bill.
“You have to exceed the standard deduction or it’s moot,” says Parrish.
Itemizing deductions involves filling out Schedule A on federal Form 1040, with charitable deductions accounted for in the section on “Gifts to Charity,” lines 11 through 14. The number on line 17 of Schedule A then transfers onto line 9 of Form 1040.
Other allowable deductions include medical and dental expenses, state and local taxes, real estate and personal property taxes, home mortgage interest and points, mortgage insurance premiums, investment interest, and casualty and theft losses from a federally declared disaster.
If these and other allowable deductions add up to more than the standard deduction amount, take advantage of them.
Rules for claiming the deduction
Must be a qualifying organization
Charitable donations must be made to tax-exempt, 501(c)3 organizations to qualify as a deduction.
A legitimate charitable organization should be happy to provide proof of its tax-exempt status, such as by producing its Form 990. But be careful not to be taken in by scammers.
“You might get a call from someone who says, ‘We started this for the benefit of earthquake victims,’” says Parrish. “Ask for proof of its application for tax-exempt status. That’s an easy way to make sure grifters aren’t coming in and telling you it’s a great charity.”
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 meant for the public good.
- Nonprofit schools and hospitals.
- Organizations such as the Salvation Army, American Red Cross, Goodwill Industries, and United Way.
- War veterans’ groups.
For a complete list of qualified organizations, check out IRS Publication 526.
You must document your charitable contributions
The IRS requires you to keep records of cash contributions (your bank statement will do) and payroll deductions. If you donate $250 or more, the charity generally sends a written acknowledgment of the amount you contributed before you file your return. Be sure to ask for it if you don’t receive one.
If you donate non-cash contributions of less than $500, you must get receipts from the organization substantiating your donation. Oftentimes, charities such as Goodwill Industries will provide a form inscribed with its name and address on which you can list the items donated and the date it was contributed. The IRS does require that the items you donate be in good condition; this rule is an attempt to prevent donors from giving away worthless items and exaggerating their value to inflate the deduction amount on their tax returns. The Salvation Army provides valuation guidelines on its website.
Non-cash contributions that exceed $500 require you to fill out and attach Form 8283 to your return. Any property valued in excess of $5,000 must be appraised by a qualified organization. Parrish says the recipient organization often will furnish an appraisal. “If you’re going to give art to a museum, the museum may help you get a qualified appraisal for your art,” he says.
Keep a copy of all your receipts in case the IRS comes calling to verify any charitable deductions you claim on your federal tax return.
Expenses from volunteer efforts count
While you won’t get a deduction for the value of your time or services when volunteering, any purchases made to benefit an organization can be deducted if they’re not reimbursed. Keep a record of items you buy to benefit nonprofits, as well as receipts.
Likewise, actual costs for gas and oil can be deducted for activities such as travel to charitable events or to a donation site. Or you can take the standard mileage deduction, which has been stuck at 14 cents per mile for many years.
Strategies for taking the charitable deduction
Bunch your deductions
It may not be possible to donate enough each year to take advantage of the charitable deduction. One strategy is to consolidate — or “bunch” deductions — from multiple tax years.
To increase his deductions last year, Parrish gave away a recreational vehicle, and the organization receiving it sold it and sent him a qualified appraisal for his records.
“We put through a lot of our deductions in the past year so that we will itemize our taxes and get the value of our deductions,” says Parrish. “And we may be cutting back this year and increasing deductions the following year. Bunching your deductions in one tax year makes a lot of sense.”
Give money to donor-advised funds
If you put money in a donor-advised fund by Dec. 31, you can take an immediate deduction and decide later to which organization you wish to direct the proceeds.
“You have the luxury of thinking about it,” says Parrish.
This also gives you the opportunity to augment your donations in a particular tax year for tax-deduction purposes.
Note that there are some occasions when a charity will refuse a donation if it’s not in its best interests to accept it. For example, if there are still tanks underground where a former gas station once stood, the empty lot isn’t going to be worth much to a charity.
“Charities can and often do turn down donations,” Parrish says.