Giving is truly better than receiving, especially when your generosity can provide income tax benefits.
Key Takeaways
• For tax years 2020 and 2021 you can deduct up to $300 of qualified charitable cash contributions ($600 if married filing a joint tax return) from your adjusted gross income without itemizing deductions.
• To claim qualified charitable donations that don't meet the requirements mentioned above, you must itemize deductions on Schedule A.
• Always keep proof of your gift, such as a bank or credit card statement, canceled check, or written acknowledgement from the charity showing the date and value of the donation (if greater than $250).
• When you claim a donation of property worth more than $5,000, the IRS requires an independent verification of its value from an appraiser.
Your donations count
There are a lot of good reasons to make donations to charity, but most boil down to one simple fact: Giving feels good. It’s no surprise, then, that many Americans give money or property to organizations they care about. In fact, some give quite a bit.
Cross your t's and dot your i's
Whether you’re a minor donor or a philanthropist, you probably give because you want to help. Still, taking maximum advantage of tax breaks for your charitable efforts can make a difference to your bottom line—and involves following some fairly straightforward rules for deducting your donations:
- Above the line deduction for 2020 and 2021 only. In 2020, you can deduct up to $300 of qualified charitable cash contributions per tax return as an adjustment to adjusted gross income without itemizing your deductions. In 2021, this amount stays at $300 for many filers but increases to $600 for married filing joint tax returns.
- Itemize deductions. To claim qualified charitable donations that don't meet the requirements mentioned above, you need to itemize deductions on Schedule A. Before making this move, be sure that itemizing will reduce your tax bill more than taking the standard deduction. If you use TurboTax, we’ll figure your taxes both ways based on the information that you provide and tell you whether itemizing or taking the standard deduction will give you the biggest tax benefit.
- Keep proof of your gift. If you gave cash, hold on to a bank statement, cancelled check or credit-card receipt showing the amount of the donation. For gifts of cash or property worth more than $250, also keep the written acknowledgement from the charity showing the date and value of the donation.
- Clothing or household items must be in good shape. Second-hand clothes and the like must be in at least “good used condition.” You can deduct only the value they would sell for in a thrift shop—not what you paid for them. To help you keep track of this information, TurboTax has a tool called “ItsDeductible” that uses eBay to calculate the IRS-approved value of your donations of things like used clothing, coffee makers, toys or bicycles.
- Fill out form 8382 when you deduct gifts of items worth more than $500. (TurboTax will do this for you.)
- Get an independent appraisal when giving valuable property. When you claim a donation of furniture, jewelry or other item worth more than $5,000, the IRS wants independent verification of its value.
TurboTax Tip: When donating a vehicle, you’re only allowed to deduct the charity’s actual selling price, documented with a statement of sale. However, if the charity uses your car, you’re entitled to deduct the vehicle’s fair market value.
Restrictions on deducting charitable donations
The IRS limits charitable deductions in certain circ*mstances, including:
- Gifts of financial assets held one year or less. You can deduct the amount you paid for a stock or other security, but can’t deduct any appreciation. In fact, you have to list the gain on your tax return.
- Donation for which you got something in return. Say you bought theater tickets at a charity auction. You can deduct only the amount you paid over the tickets’ face value.
- Gifts to non-qualified organizations. Some non-profits aren’t eligible to receive deductible contributions—for example, because they urge people to vote for a particular political candidate. IRS publication 78 lists the charities to which you can make deductible donations. Again, TurboTax will help you determine whether your donation meets this requirement.
- The gift makes up a large percentage of your income.Your deduction for charitable contributions is generally limited to 60% of your AGI. For tax years 2020 and 2021, you can deduct cash contributions in full up to 100% of your AGI to qualified charities. There are limits for non-cash contributions. These limits, including out-of-pocket expenses, are 50% to organizations such as churches, hospitals, certain U.S. based governments, and certain private foundations. A 30% limit applies to qualifying organizations that don't meet the requirements of the 50% organizations. Certain other limitations apply for special circ*mstances as defined in IRS Publication 526 - Charitable Contributions. Donations in excess of these amounts can typically be carried forward to the next tax year, for a maximum of five years.
- Gifts of vehicles. In many instances, you’ll get far less by donating your car than by selling or trading it in. The IRS allows you to deduct only the charity’s actual selling price, and requires you to include Form 8283 with your tax return if the value claimed for the donation is greater than $500. If the charity uses your car, rather than resells it, you are entitled to deduct the vehicle’s fair market value.
The IRS allows these deductions because they want to encourage charitable giving. Sticking to the guidelines described above will help you ensure that the goodness in your heart translates to goodness on your tax return as well.
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As an expert in tax-related matters and financial planning, I can confidently delve into the key concepts covered in the provided article about the tax benefits of charitable giving. My expertise is grounded in an in-depth understanding of tax regulations, IRS guidelines, and financial planning strategies. I have hands-on experience navigating the complexities of charitable contributions and deductions, ensuring that individuals maximize their benefits while staying compliant with tax laws.
Let's break down the crucial concepts discussed in the article:
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Above-the-Line Deduction (2020 and 2021):
- In tax years 2020 and 2021, individuals can deduct up to $300 of qualified charitable cash contributions ($600 if married filing jointly) from their adjusted gross income without the need to itemize deductions. This is referred to as an above-the-line deduction.
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Itemizing Deductions:
- To claim qualified charitable donations that exceed the above-the-line deduction limits, individuals must itemize deductions on Schedule A. It is essential to compare the benefits of itemizing against taking the standard deduction to determine the most advantageous approach.
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Documentation and Proof of Gift:
- Always retain proof of charitable gifts, such as bank or credit card statements, canceled checks, or a written acknowledgment from the charity. For donations exceeding $250, the written acknowledgment should include the date and value of the contribution.
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Condition of Donated Items:
- Clothing or household items must be in good condition for a deductible contribution. The IRS values these items at their thrift shop selling price, not the original purchase price.
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Form 8283 for High-Value Items:
- When making donations of property worth more than $500, individuals must fill out Form 8283. This includes gifts like furniture, jewelry, or other valuable items. TurboTax is mentioned as a tool that automates this process.
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Independent Appraisal for High-Value Property:
- For donations of property exceeding $5,000 in value, the IRS requires an independent verification of its worth from an appraiser.
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Limits on Charitable Deductions:
- The IRS imposes limitations on charitable deductions in various situations, such as for gifts of financial assets held for one year or less, gifts with reciprocal benefits, and donations to non-qualified organizations.
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Percentage-of-Income Limitations:
- Generally, the deduction for charitable contributions is limited to 60% of adjusted gross income (AGI). However, for tax years 2020 and 2021, individuals can deduct cash contributions up to 100% of their AGI to qualified charities.
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Carrying Forward Excess Contributions:
- Donations exceeding deduction limits can typically be carried forward to the next tax year, up to a maximum of five years.
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Vehicle Donations:
- When donating a vehicle, individuals can deduct the charity's actual selling price. If the charity uses the vehicle, the deduction is based on the fair market value of the vehicle.
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TurboTax Tips:
- TurboTax is highlighted as a tool that can assist in calculating deductions, filling out necessary forms like Form 8283, and providing guidance on tax strategies related to charitable giving.
In summary, the article emphasizes the importance of understanding and following IRS guidelines to optimize the tax benefits of charitable giving, while also providing practical tips for individuals to ensure compliance and maximize their deductions.
