Donating to Charity and Your Taxes
There are many reasons that people give charitable donations that do not include the added benefit of being tax-deductible. Although doing so can benefit you in many ways at tax time.
You have heard the term “tax-deductible” constantly but what does it mean? A tax-deductible donation is when you contribute money or goods to a tax-exempt organization such as a charity. Donating money or goods to a tax-exempt organization can reduce your taxable income. However, for the 2020 tax year, there have been changes that you may or may not be aware of that can benefit you as we head into tax season.
The 2020 tax change states that you can deduct up to $300 of cash donations without having to itemize, this is referred to as an “above the line” donation. In 2021 there will be an update that allows $300 per person, which means married couples filing jointly can claim up to $600 without having to itemize.
While this may seem very cut and dry there are limitations as to what qualifies as a deduction, what you can deduct, and the amount of money that qualifies.
Please read more to further understand how this process can work to your benefit as you file your taxes.
WHAT CAN I DEDUCT?
It is important that when you make the decision to donate that you understand the organization and that it falls under tax-exempt in order to receive the deduction. If you are not sure if the organization you are donating to falls under this exemption we suggest using IRS Tax Exempt Organization Search to verify this information. It is also important to verify that your donation also qualifies.
If you are not sure which organizations are tax-deductible you can begin with churches, temples, mosques or other religious organizations; nonprofit schools or hospitals; the United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America; and veterans groups and organizations, including the Salvation Army, American Red Cross, CARE, and Goodwill Industries. Federal, state, and local government donations for public purposes such as donations to clean or rehabilitate a park, are also tax-deductible.
One tax-deductible item you may not think about deducting is volunteering, While you are unable to deduct the value you may add with your time and service you can deduct expenses that you can incur for a qualified organization. In order to qualify those expenses must be directly connected to the volunteer work, you have done. These expenses can include the mileage driven to charitable events and volunteer opportunities, as well as the mileage traveled to bring donations to the organization. You can deduct these expenses using your receipts for gas and mileage, or you can take the standard mileage rate. Be sure to document and file all receipts as proof of the deduction for any future tax purposes as well.
HOW MUCH CAN I DEDUCT
The amount of deduction can vary based on your adjusted gross income. In general, you are able to deduct up to 60% of your adjusted gross income via charitable donations, but based on the type of organization and contribution this can be limited to 20%, 30%, or 50% deduction. This applies to all the donations you make throughout the year and does not limit you to the number of organizations you can donate to. If your contributions exceed the limit then often they can be deducted over the next five years, or until they’re gone, through a process known as carryover.
THINGS THAT CANNOT BE DEDUCTED
Donations are subject to restrictions that can be included in filing your taxes, but there are donations that cannot be deducted.
In cases such as donating to most foreign organizations, civic leagues, labor unions, chambers of commerce, and other social groups these are not deductible as well as donations that you make to political organizations or candidates.
DOCUMENT YOUR CONTRIBUTIONS
As with tracking your mileage for tax benefits, it is important that you track your deductible donations, regardless of the amount. It is important to track these donations through qualifying documentation such as a credit card statement, bank statement, canceled check, and a receipt from the charity that includes the date, amount, and name of the organization. If you made a donation through your employer as an automatic deduction keep copies of your W-2 or pay stubs that show the amount and date of that donation.
Donating to a worthy cause is more than just volunteering your time and/or money, it is also a way to show support for an organization you believe in and a way for you to give back to the community.
While you may be donating to a cause simply as a way to support your community don’t forget that this can also benefit you as well. You may not be able to provide time to a charity in person but your donation can go a long way in helping to ensure that it continues to operate.
The most important thing is to continue to document your contributions and be sure to keep records that allow complete transparency when you go to file your taxes. If you decide to donate online then create a digital folder that can be accessed and organized directly from your computer that holds your confirmations and receipts.
There can be a lot of confusion regarding the ever-evolving tax laws and updates and it is impossible to keep track of these changes as they happen. We suggest that anyone struggling with their taxes speak with a professional CPA to alleviate any confusion.