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 of cash and property to charitable organizations, 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— up to a certain percentage of the taxpayer's AGI based on the type of property given and the type of tax-exempt organization receiving the donation.
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 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 public purposes (such as maintaining a public park).
Not everyone Is eligible to deduct
Please note, a special measure in the CARES Act (the coronavirus relief bill) allows taxpayers to take an above-the-line deduction for up to $300 in charitable donations beginning in 2020. This means, even if you take the standard deduction, you can still claim up to $300 in donations for 2020 when you file your taxes in 2021.
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 effectively doubled, which increases the possibility that taxpayers may be better off opting to take it rather than to itemize. Further, the SALT deduction for state and local taxes has been capped at $10,000 ($5,000 if married filing separately). This also makes it more likely that those taxpayers in higher tax states 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 into one tax year 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 economic 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 donation – 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 50% of your adjusted gross income (AGI). However, only donations to certain organizations qualify for the highest limit. Donations to certain qualified conservation organizations may be eligible for a higher limit.
Churches, educational institutions, hospitals, and others are eligible for the 50% AGI limitation. 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.
Temporary Suspension of Limits on Charitable Contributions
In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer's AGI. Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100% of their adjusted gross income. A corporation may deduct qualified contributions of up to 25% of its taxable income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:
- a cash contribution;
- made to a qualifying organization;
- made during the calendar year 2020
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
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.