Have you sent in a charitable donation and wonder if it will count as a tax deduction? The rules for this are a little complicated because you generally must itemize your tax deductions if you decide to take charitable deductions.
Most people take the standard deduction each year because that amount is greater than the total of the itemized deductions they can take. Plus, taking the standard deduction is just easier! However, if you are planning to take the medical and dental expense deduction, the home office deduction, or the mortgage interest deduction, you will need to itemize your deductions.
You must choose either the standard deduction or itemized deductions on IRS Schedule A. The rules for taking charitable deductions can be a bit overwhelming.
For this reason, it is advised that you work with a qualified tax consultant when doing your taxes. A qualified tax professional should be familiar with the current tax laws, rules, and regulations.
For example, for the tax year 2020, you can deduct up to $300 of your cash donations to qualified charitable organizations without having to itemize your tax deductions! This new rule allows taxpayers the opportunity to take the standard deduction and take a certain amount of charitable donations.
An important consideration when taking charitable deductions is proper documentation. Make certain your backup material for your tax return is in order.
Having the right documentation means that you have receipts or letters from the charitable organization that state the value of the items you have selected to donate, the date of the donation, and the name of the qualified charitable organization. Make sure you work with a qualified organization and have written acknowledgments for all property and cash contributions.
Who Qualifies as a Charitable Organization?
The charity you donate to must be a qualified tax-exempt organization. You should make sure the charitable organization you elect to donate to has a 501(c)(3) tax-exempt status, according to the Internal Revenue Code. There are organizations that do not have this status but do count as charitable organizations. Churches and other religious establishments are examples of this.
Other examples of organizations that may be included as qualified for tax purposes are the Red Cross, nonprofit museums, schools, and volunteer fire companies.
Learn more about how to maximize your charitable tax deductions to get the most out of your annual tax return. You want to make sure you get the best benefit possible. It’s advisable that you book a tax consultation with a qualified tax professional to get the best results. They can help you determine which charities qualify; some public charities are not eligible.
To check the status of the organization you donate to, use the IRS’s free search tool. You can do a tax-exempt organization search this way. It’s also a good idea to work with a qualified tax professional when taking certain tax deductions because you will have to itemize your tax return, which can get complicated.
Which Charitable Contributions Can You Deduct?
The charitable contributions that count as tax deductions on IRS Schedule A include cash or property. You cannot include any donations or amounts that you have not donated yet. You may deduct things like clothing, household appliances, jewelry, and other property.
However, you must have receipts or letters of acknowledgment from the charity stating the value, date, and name of the charity in regards to your donation.
How Much Can You Deduct?
Prior to 2017, the limit for cash deductions was 50% of your adjusted gross income. Your adjustable gross income (AGI) is the amount before calculating your taxable income.
The Tax Cuts and Jobs Act (TCJA) of 2017 increased this amount to 60% and will be in effect until the end of the tax year 2025. If you exceed this threshold, you can carry the excess amount over to the next tax years for a maximum of five tax years.
You can deduct up to 60% of your adjusted gross income if your donations were made of cash. You may be limited to 20%, 30%, or 50%, depending on the charitable organization. For more details on the limitations, consult a tax accountant or check out IRS Publication 526: Charitable Contributions.
What Records Do You Need to Keep?
Records that work for tax purposes include letters from charitable organizations, canceled checks, receipts, and some appraisals of what you have donated. When you establish your record-keeping system for your annual tax return, it’s important that you have the right details on your information.
You must have the date that you donated the items, the name of the charity you donated to, and the amount (the value) of the items you donated on all of the records you keep for tax purposes. This way, if you are audited, you have exact documentation of what you donated, to whom you gave cash or property, and when you made the donation.
One consideration you may want to take is to keep detailed records like bank statements, credit card statements, or canceled checks. These items should have all of the details listed above. This makes it easy for you to have proper documentation because they already have the charity’s name, the date, and the amount you gave.
Did you make a charitable donation via your paycheck? Be sure to keep all copies of your W-2 or your pay stubs, which would show the date and the amount that was withheld from your paycheck for charitable contributions.
If you donate more than $250 in property to a qualified charitable organization, you need to get a written letter of acknowledgment from them. Make sure it has the date of the donation, the amount of the donation (the value of your property), and the name of the charitable organization. Also, you need to have this letter when you file your annual tax return.
If you donate $500 or more in property to a qualified charitable organization, you will need to complete IRS Form 8283: Noncash Charitable Contributions. You also need to attach an appraisal letter of the property you donated if the value was greater than $5,000.
Most charitable organizations will give you a letter or receipt with this valuable information already written on it. If you do not have proper documentation (proof of your donation), you should not claim the deduction on your tax return.
How to Deduct Charitable Donations
You can deduct charitable donations by using IRS Schedule A: Itemized Deductions. Schedule A is for itemized deductions. If you choose to itemize your tax deductions, you will use the total of Schedule A and add it to IRS Form 1040.
IRS Schedule A is for all of your itemized deductions. You will total everything you choose to include as an itemized deduction on this schedule. Examples of things you might deduct include dental and medical expenses, home office expenses (office supplies, for example), state and local taxes paid, and any mortgage interest you incurred.
Since you cannot itemize tax deductions and take the standard deduction, you must choose one. If you take the standard deduction, you cannot itemize your charitable contributions.
Conversely, if you itemize your tax deductions, you cannot take the standard deduction. Taking the standard deduction is generally easier than itemizing, so weigh the pros and cons of this decision before itemizing your annual tax return.
Other Considerations
- You are NOT permitted to deduct political campaign gifts, contributions to foreign governments, donations to for-profit hospitals and educational institutions, gifts to labor unions or other related business associations, and gifts made to individual taxpayers.
- There are new tax considerations for the tax year 2020. You are able to deduct up to $300 of cash charitable contributions without having to itemize your taxes! This limitation is per tax return.
- The CARES Act removed the 60% limit of your adjusted gross income for any cash donations that were made to public charitable organizations.
- While you cannot be reimbursed for volunteering your time and efforts, you can be reimbursed for charitable driving and other expenses incurred for a qualified charitable organization. You should keep an accurate mileage log and all receipts related to transportation if you decide to take advantage of this tax opportunity.
Conclusion
Are you wanting to make a charitable tax deduction but don’t know where to start? Have you decided to itemize your tax deductions rather than take the standard deduction? Are you unsure as to which one would be best? Ask for tax help!
At Borshoff Consulting, we make sure your tax returns are done right! You can count on our tax expert to do your tax return accurately and to help you get the best results. You can rely on Indiana’s tax expert to steer you in the right direction! If we can’t help you, we’ll find someone who can.
Did you know we also do business consultations for small businesses? That’s right; we have a wide range of business services available to both small businesses and individuals. We also have tax resolution and auditing support services available. Be sure to book a free consultation today to find out how we can best help you with your taxes or business concerns.
