Gifts to charity are one of the best tax-saving opportunities available. Not only does the charity itself benefit, but the taxpayer receives a tax deduction, at least to a certain limit. As with most tax benefits, changes are periodically made to those limits and other regulations, including some noted below that came into effect for 2019.
- The Charitable Contributions Deduction allows taxpayers to deduct contributions to charitable organizations of cash and property within certain limitations.
- In order to deduct charitable contributions, you must make sure the recipient charity is a qualified organization under IRS rules.
- The IRS imposes caps on the total value of charitable contributions that may be tax deductible in a given year—currently up to 60% of a taxpayer’s adjusted gross income (AGI).
The Basics of the Benefits
The ways you can contribute to charity, along with the limits and benefits of doing so, are varied and potentially confusing. Here's a rundown, beginning with who is eligible to receive and give while getting the benefits of the exchange.
Not all Donations Are Eligible for Deductions
The recipient must be duly qualified. That rules out friends, relatives, and any other person or group who lacks tax-exempt status as determined by the U.S. Treasury.
The list of eligible entities includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Nonprofit veterans' organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations can also qualify. If you have any question about an organization, the IRS Tax Exempt Organization Search tool can help you verify its tax-exempt status. Even a donation to a federal, state, and local government may be eligible if the donated funds money are earmarked for charitable causes.
Not Everyone Is Eligible to Deduct
Be aware that changes in tax law in effect as of 2019 make it less likely that it will make financial sense to itemize. The standard deduction has been basically doubled, which increases the possibility that taxpayers may be better off opting to take it rather than to itemize. Further, the so-called SALT deduction for state and local taxes has been capped at $10,000 ($5,000 if married filing separately), which also serves to make it more likely that those whose taxes exceeded that amount may opt against itemizing since they, too, may benefit more by simply taking the standard deduction.
If you hope to deduct your contributions, it may pay to group them for maximum tax impact. You could, for example, choose to donate in one year what you might have given over two years, then skip a year.
Some Contributions Gain Only Partial Credit
For certain donations, some calculation is required to determine the deduction you're entitled to claim. These include donations for which you receive at least a partial benefit. If you buy a T-shirt "for a cause," for instance, the entire price of the shirt isn't deductible—only whatever you contributed in excess of the value of the shirt. If you donated $40, say, and the stated value of the T-shirt is $20, the deductible amount of the gift is only $20 ($40—the shirt's $20 value). The same goes for events like charity dinners, where the fair market value of the meal must be subtracted from the cost of the event to determine the amount of your donation.
Donated goods receive only their market value
Many folks donate clothes, household items, and more to Goodwill, the Salvation Army, and similar charities. This is a great way to declutter and help others. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition; additional regulations apply to vehicle donations. You can't claim the new value for a noncash donation, but must use the item's fair market value. That price is similar to a thrift store value.
Some tax preparation programs include a calculator to help determine items' value. When donating noncash charitable contributions, if your total deduction is greater than $500, you must file IRS Form 8283. Additionally, if you give cash or property worth more than $250, you need a written acknowledgment from the organization as well. IRS Publication 561 is a useful resource to help you decide the value of your noncash contributions.
You may donate no more than 30% of your AGI to certain types of charitable groups, including veterans' organizations, fraternal societies, and nonprofit cemeteries.
Your generosity when giving may hit a ceiling when it comes to tax benefits. Here's an accounting of those limits and how they're applied.
There is a limit to the amount of all charitable contributions allowed during a tax year. Your total charitable deductions are generally limited to no more than 60% of your adjusted gross income (AGI). However, only donations to certain organizations qualify for the highest limit. These organizations include churches, educational institutions, hospitals, and others as defined by the IRS. Donations to certain qualified conservation organizations are also eligible for the higher limit. Donating stock to a charity can be especially beneficial to you and the charitable organization.
A lower limit, of no more than 30% of your AGI, applies to other types of charitable groups. Among the categories to which this lower amount applies are veterans' organizations, fraternal societies, nonprofit cemeteries, and certain private foundations.
Your word that you gave to a charity isn't good enough for the IRS. As a taxpayer you must keep detailed records to support your contributions. In order to claim a deduction for cash, you must have a written record, canceled check, letter from the organization, or bank/payroll debit.
The Bottom Line
Don’t let rules and regulations deter you from claiming the charitable deduction. For specific guidance about what is and isn't allowed, download a copy of IRS Publication 526 and Form 8283 (for noncash charitable donations) for easy reference and check the IRS Charitable Contribution Deductions to clarify any potential charity contribution limits.