Today is a very special day – Giving Tuesday: a day when individuals and businesses help those in need by making charitable contributions with the possibility of also trimming their tax bills before the end of the year. This year’s Giving Tuesday is expected to be a big day of giving with so many people in need. If you are planning to give this Giving Tuesday or at any time, it is important to know what qualifies as a charitable organization and donation when considering taking a charitable deduction.
Most of us are familiar with the idea of donating something to a charity and “writing it off.” But there is often some confusion about exactly what this means. Some believe that you can deduct contributions to any organization you want. Others insist that you can deduct the value of time spent volunteering. In fact, both of these ideas are false.
Below, we’ll explain what charitable contributions really are and how they work:
The Technical IRS Definition
A charitable contribution is when you donate money (including securities or business ownership interests), goods or services to an organization and deduct the market value of the contribution on your income tax return. The IRS elaborates:
“Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.”
Here, “qualified organizations” is the phrase to pay attention to. The IRS does not allow you to “donate” money to your Uncle Bob up the road or the pizza shop downtown and deduct it from your income taxes. Generally, the only charitable donation deductions you can take are donations made to not for profit 501(c)(3) charitable organizations, but not all nonprofits qualify. More specifically, an organization must have a religious, educational, literary, charitable, or scientific purpose and 501(c)(3) status from the IRS. If you are unsure whether an organization qualifies, use this IRS search tool to figure it out.
Different Forms of Contributions
As noted, you are permitted to donate and deduct the value of things other than money. In addition to cash, you can also donate
- Collections of valuable items
- Real estate
All of these may make you eligible for a tax deduction. There are limits, though. If the value of what you donate is $250 or more, you need to obtain and file a written acknowledgement from the qualified organization you donated to. If the value of your non-cash charitable contributions exceeds $500, you’ll need to include specific information about the charitable organization and what was donated when you file your tax return.
People often ask whether volunteer work entitles them to a tax deduction. They say, “ten hours of my time has a market value. If that’s what I gave to Habitat For Humanity, can’t I deduct it?” Logical and justified as this may seem, it’s actually not legal, according to the IRS. The value of your time is different from the value of someone else’s time, and the IRS can’t verify what you say your time is worth. Or how many hours you really volunteered. Nor can you deduct any personal expenses connected with volunteering (like the cost of putting your children in daycare). What you can deduct are costs that relate directly to your volunteer work, including:
- Uniforms or supplies
- Air or bus transportation
Required Forms & Paperwork
When it comes to making charitable contributions – and getting the deductions you are entitled to – documentation is everything. Any contribution (cash or noncash) of $250 or more requires that you get a “contemporaneous written acknowledgement” – in other words, a receipt – from the charity you donated to. Then there’s IRS Form 8283, which must be included with your tax return for non-cash donations exceeding $500 in value as well as noncash property worth more than $5,000. In the latter case, you’ll also need to get a “qualified appraisal” of the property.
Qualified appraisals are required or suggested for other non-cash contributions as well. Donated artwork valued at $20,000 or more, for instance, requires that a signed appraisal be attached to your tax return.
“Quid Pro Quo” Contributions
Some charities try to “sweeten the deal” by offering incentives for people to donate more. At first, this might seem too good to be true. A tax deduction, and free stuff? Unfortunately, it is too good to be true. As the IRS makes crystal clear:
“If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.”
In other words: if the dinner or event ticket you receive is worth as much as whatever you donated, you won’t be able to take a deduction since you have to deduct the value of what you received from your donation. This does not necessarily mean you shouldn’t donate something – it means that if you made a donation and you received something in return, you need to be aware that you can’t deduct the full amount of the donation.
Requirements for Deducting Charitable Donations
Typically, if you make a charitable donation to a qualified charity, you can deduct the contribution if you are able to itemize your deductions and not claim the standard deduction. However, under the CARES Act, there is the addition of a new charitable deduction up to $300 on your 2020 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize your deductions. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses. This will be something for taxpayers to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.
You’re able to itemize your deductions if your itemized deductions, such as deductions for home mortgage interest and property taxes, are more than the standard deduction. For tax year 2020, the standard deduction increased to $12,400 for single filers and $24,800 for married filing jointly. If you file as head of household, your standard deduction is increased to $18,650. If your itemized deductions are more than the standard deduction, you will benefit from claiming itemized deductions and will be able to deduct cash and non-cash contributions.
Usually, cash donations that you can deduct as an itemized deduction are limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2020 returns (the ones you file in 2021).
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