Christmas is around the corner, which means two things. One, you may find yourself giving donations a little more frequently than you do for the rest of the year. And two, tax season is around the corner, too.
So, naturally, you may be asking yourself, “How do charitable deductions work?” How much can you claim for donations, and how much do you have to donate to get a tax break?
Fortunately, we’ve compiled a guide on how to deduct charitable donations on your tax returns in the upcoming tax season.
Let’s jump in!
How Do Charitable Deductions Work?
You are allowed to claim tax deductions for giving to charitable causes on your Schedule A tax form.
This form is used not only for charitable donations but also for the other itemized deductions for which you are eligible.
For instance, other possible deductions include dental expenses or medical expenses that you paid during the past year, including insurance premiums. They also include mortgage interest and local/state taxes.
Before you can claim a deduction on the Schedule A, however, note that you must meet the two following IRS requirements.
First, you have to donate property or cash to claim a deduction. You cannot deduct a promise or pledge to give, only an actual payment.
Second, you have to contribute to a church or another qualified tax-exempt organization. These organizations include charities, nonprofit volunteer fire departments, and specific trusts.
A tax expert can help you to determine which entities are tax-exempt before you make donations to them.
Recordkeeping Guidelines for Charitable Deductions
Once you donate, you must obtain a detailed record of this before you claim it on your taxes.
For instance, you can use a canceled check, a bank statement, or a credit card statement as proof of your donation. Other forms of evidence include an acknowledgment letter from the charity to which you donated.
You could also get an appraisal confirming your donated property’s value.
The following pieces of information should be written on your record:
- The charitable organization’s name
- Your contribution date
- The amount of your donation
A canceled check is likely the best record since it includes all of the above information. However, a bank or credit card statement can be handy records to have if you make donations using a card versus a check.
Charitable Deduction Limitations
As a general rule of thumb, you may deduct contributions that are between 30% and 60% of your AGI, or adjusted gross income, based on the type of charity you’re donating to.
In addition, you may deduct the contribution of a capital gains asset that has been appreciated. This contribution must be no greater than one-fifth of your income.
So, what happens if your gift surpasses the abovementioned thresholds? Fortunately, you may carry over any excess to the next tax year.
Still, you can carry over excess contributions for no more than five years.
What Charitable Donations Can’t You Deduct?
Contributions to the following parties are not tax-deductible:
- A foreign government
- A hospital
- A for-profit school
- A business association
- A chamber of commerce
- A labor union
- Individual people
- A political party
- A political action committee
- A political campaign
However, this leaves plenty of opportunities for you to still claim tax deductions and thus reduce your tax liability year after year.
What About Contributions That Are Not Cash?
Yes, you can deduct a non-cash contribution. However, this is where things get a little tricky.
According to government rules, you need to substantiate your donated property’s or good’s fair market value. That means you need proof of how much your donated boat, vehicle, or plane is worth, for example.
You will also need an acknowledgment in writing from your gift’s recipient, saying that you made such a donation.
Furthermore, if the property is valued at over $500, you have to complete the Form 8283 tax form. This form should be included with your other documents when you file your taxes.
Pointers When Donating Items That Are Not Cash
Before you make non-cash donations, you may want to create a list explaining which items you plan to give away. This is important because you will have to add these details to your Form 8283.
Also, you should make notes about each item’s condition. That’s because the IRS allows deductions for only those items that are in good condition.
Be sure to determine the item’s value, as well. Goodwill and the Salvation Army usually offer valuation guidelines to those who choose to donate items like appliances or clothing to them. Also, if you’re giving a brand-new item, you should save the item’s price tag or store receipt.
The more caution you exercise in the charitable deduction process, the less likely you are to face allegations of tax fraud down the road.
How We Can Help
If you feel that you have made a mistake in the area of charitable deductions, we can help.
In addition to answering the question “How do charitable deductions work” above, we offer top-of-the-line service to taxpayers who are facing tax issues with the Internal Revenue Service.
In fact, in a difficult situation, we can put a halt to IRS wage garnishment in 24 hours. We’ll investigate your case and work with you to resolve it in the most personally favorable manner possible, given the circumstances.
Get in touch with us to learn more about how we can represent you in your dealings with the IRS and protect your financial best interests long term.