Tax Deductions for Charitable Donations

The world is filled with underserved communities, and charitable donations have been a saving grace for millions around the globe. That said, these generous donations are still a form of cash flow and must be accounted for. 

If you’re trying to figure out how tax deductions work and are uncertain about the deduction limits, you’re in the right place. Read on to learn the fundamentals of tax deductions for charitable donations and tap into key insights to keep a seamless and compliant financial record. 

What Is a Charitable Donation?

A charitable donation is essentially a contribution, either in cash or property, given to a nonprofit organization to support its mission. In the United States, both individuals and corporations can deduct these donations from their federal tax returns. To claim these deductions, taxpayers must file either Form 1040 or Form 1040-SR and itemize their contributions using Schedule A. 

How Do Tax-Deductible Donations Work?

To get a better understanding of how tax-deductible donations work, let’s cover the crucial points of this process. 

Donate to a Certified Organization

First, to qualify for tax deductions, donations must be made to certified organizations recognized by the IRS as tax-exempt. These include charities, religious institutions, and educational organizations. Before donating, verify the organization’s status using the IRS’s online ‘Tax Exempt Organization Search’ tool. Only donations to certified entities are tax-deductible. This ensures that your contribution is going to a legitimate cause and qualifies for a tax benefit.

Itemize Deductions

To claim a tax deduction for charitable donations, you must itemize deductions on your tax return. Itemizing involves listing all deductible expenses, including charitable contributions. It’s beneficial if total itemized deductions exceed the standard deduction amount for your filing status. Be aware that itemizing requires detailed record-keeping and documentation.

Keep Proofs of Your Gifts

Maintaining proof of your charitable donations is crucial. For cash donations, keep bank records or written acknowledgments from the charity. For property donations, keep a detailed receipt from the charity stating the item and its condition. For donations over $250, a written acknowledgment from the charity is required. This documentation is essential if the IRS requires proof of your contribution.

Clothing or Household Items Must Be in Good Shape

When donating clothing or household items, they must be in “good used condition or better” to qualify for a deduction. Obtain and keep a receipt from the charity for these items, describing their condition. If the total value of the donation is over $500, you must also complete IRS Form 8283, providing additional details about the items.

Take Advantage of Tax Deductions for Volunteering

While you can’t deduct the value of your time spent volunteering, out-of-pocket expenses related to volunteering are deductible. This includes costs like travel, supplies, and uniforms. Keep detailed records and receipts for these expenses. If your expenses are over $250, obtain an acknowledgment from the charity confirming these expenses.

Be Mindful of the Deadline

Charitable donations must be made by December 31st of the tax year for which you are claiming the deduction. Donations made on or before this date can be included in that year’s tax return. This deadline is crucial for proper tax planning and maximizing the benefits of your charitable contributions. Always check the postmark or transaction date to ensure your donation falls within the correct tax year.

What Are the Limitations on Deducting Charitable Donations?

While there are several advantages to tax deductions for charitable donations, there are also limitations to these deductions you should be mindful of. Here are the key considerations:

AGI Limitation

The amount you can deduct for charitable donations is limited to a certain percentage of your AGI (adjusted gross income) and is capped at 60%. While donations of property and stocks can be limited to 30% or 50% of AGI, excess contributions can be carried forward for up to five subsequent tax years, but the same percentage limitations apply each year.

Non-Qualified Organizations

Donations made to non-qualified organizations, such as political parties, candidates, for-profit schools, or individual persons, are not tax-deductible. Only contributions to IRS-recognized tax-exempt entities qualify. It’s important to verify the tax-exempt status of an organization before making a donation if you intend to claim it as a deduction. 

Fair Market Value Considerations

When donating property or items, the deduction is generally limited to the fair market value of the items at the time of the donation. For new or expensive items, an appraisal may be required. Items must be in good condition or better, and the valuation should be reasonable and justifiable.

Record Keeping and Documentation

Proper documentation is crucial for all charitable contributions, especially for donations over $250. Without adequate records like bank statements, receipts, or written acknowledgments from the charity, you risk the deduction being disallowed in the event of an IRS audit. This applies to both cash and non-cash donations.

What Is the Maximum Allowable Deduction for Charitable Donations on Your Tax Returns?

As mentioned earlier, the maximum allowable deduction for charitable donations on your tax returns largely depends on your AGI rather than your filing status. Generally, you can deduct up to 60% of your AGI for cash donations to qualified charities. 

This limit applies whether you are single, married and filing jointly, married and filing separately, or head of household. For donations of property or stocks, the limit may vary between 30% and 50% of your AGI. If your donations exceed these limits, the excess can be carried forward and deducted in up to five subsequent tax years, subject to the same percentage limits.

How to Claim Tax-Deductible Donations on Your Tax Return?

Claiming tax-deductible donations on your tax return is a straightforward process, but it requires careful documentation and attention to detail. Here’s how to do it:

  1. Gather Documentation: Compile all receipts, bank records, or written acknowledgments for your donations. This includes details of the charity, date of donation, and amount or description of the item donated.
  2. Determine Itemization Feasibility: Assess whether itemizing deductions is more beneficial than taking the standard deduction. This depends on the total of all your itemizable deductions, including charitable donations, exceeding your standard deduction based on your filing status.
  3. Complete Schedule A (Form 1040): If itemizing is advantageous, use Schedule A of Form 1040 to list your charitable donations. Enter the total amount of cash donations in one section and non-cash donations in another.
  4. Fill Out Form 8283 for Non-Cash Donations Over $500: If you’ve donated property or items worth more than $500, you’ll need to fill out and attach Form 8283, which requires more detailed information about the donated items.
  5. Calculate Deduction Limits: Ensure your total charitable contributions don’t exceed the applicable percentage of your AGI for property donations, depending on the type.
  6. Carry Over Excess Contributions: If your donations exceed the AGI limits, calculate the carryover amount that can be deducted in future tax years, for up to five years.
  7. Keep All Documentation: Even after filing your tax return, keep all documentation related to your charitable donations for at least three years as proof in case of an IRS audit.
  8. File Your Return: Submit your tax return with Schedule A and any other required forms, such as Form 8283, by the tax filing deadline (April 15th). This can be done either electronically or by mail.

Closing Remarks: Optimizing Charitable Giving in Your Tax Planning

The world can use more generosity, and charitable donations are a great way to help underserved communities and organizations. And to make the most of your donations, it’s best to stay on top of the cash flow to ensure you’re getting the appropriate tax deductions for your generous contributions. 

If you’re still having trouble grasping the legal know-how of tax deductions for charitable donations, we can help with your finances. At doola, we provide easy-to-use bookkeeping software to keep your records organized and up to date.

Plus, we have a team of experienced accountants to guide you through every step. Reach out today to get started with claiming your tax deduction on the right foot! 

FAQs

Can I deduct the value of my time or services donated to a charity?

No, you cannot deduct the value of your time or services donated to a charity on your tax return. While expenses related to volunteer work (such as travel expenses or supplies) may be deductible, the IRS does not allow a tax deduction for the value of services rendered.

Can I carry forward charitable deductions if I cannot use them all in one year?

Yes, if your charitable contributions exceed the deduction limits based on your adjusted gross income (AGI), you can carry the excess amount forward to future tax years. This is possible for up to five years after the year of the first donation.

Can I deduct donations made to foreign charities?

Donations made directly to foreign charities are not deductible on your U.S. tax return. However, you may be able to deduct donations to U.S.-based organizations that transfer funds to foreign charities, provided the U.S. organization has control over the funds.

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