Generally speaking, Americans are a generous lot. According to the National Philanthropic Trust, Americans gave $449.64 billion to charities in 2019. Perhaps one motivation for being generous is that qualified charitable contributions are deductible on your taxes. Frequently, December is a particularly active month for donations because only donations made during the tax year are deductible on a tax return for that year. This is how the holiday season impacts the tax season.
Beyond simply writing a check, there are many other ways you can help charities in their work while lowering your tax bill. The IRS gives generous allowances for many types of donated items, but it’s up to you to save your records and know how much you’re entitled to deduct.
The Basics of Charitable Contributions & Tax Deductions
Organizations That Accept Tax-Deductible Donations
For your donation to qualify for a tax deduction, you must contribute to an organization on the IRS’s list of qualified charities. Many major charities and religious groups are on the list. But if you donate to a smaller group and you’re not sure whether your contributions are legitimately tax-deductible, check the IRS’s list. You search by the charity’s EIN (Employer Identification Number), name, city, state, or any combination of these. The more you specify, the better the search results.
Keep in mind that you can never deduct donations to foreign charities. However, many foreign charities have an American branch to which you can contribute a tax-deductible donation. Also, remember that charitable donations are an itemized deduction. For itemized deductions to be of benefit to you, your combined itemized deductions need to be greater than your standard deduction.
However, starting with 2020 tax returns, Coronavirus Aid, Relief and Economic Security (CARES) Act allows for an additional “above-the-line” deduction for cash contributions of up to $300. If you do not itemize on your 2020 tax return, you can claim this new deduction.
Generally, you can deduct charitable contributions of up to 60% of your adjusted gross income (AGI). The 60% limitation applies to public charities and private operating foundations. A 30% limitation applies to private foundations, as well as to contributions of capital gain property using fair market value to figure your deduction. A 20% limitation applies to certain gifts of capital gain property to non-60% organizations.
Generally speaking, the limits apply from highest to lowest. If your donations to 60% organizations are less than 60% of your AGI, you can deduct contributions with a 30% limit up to the lower of 30% of your AGI or 60% of your AGI minus your 60% donations. Consult IRS Publication 526 for more details.
If you donate more than the deduction limit, you can carry over the extra to the next year’s taxes and deduct it then. The carryover applies for up to five years. The same limitations apply to the amounts carried over in the year they are applied.
Note that for the 2020 tax year, the CARES Act temporarily eliminated the 60%-of-AGI limitation. For cash contributions made in 2020, you can deduct up to 100% of your AGI. The 60% limitation is scheduled to return in 2021.
If you’re planning to make a large contribution, ask the organization for its deductibility code or check for it in the IRS database. The IRS may list one of a dozen deductibility codes to let you know of any specific rules that apply to donations to a particular organization. If there’s no deductibility code listed, then the organization is a public charity to which donations of up to half of your AGI are deductible in most cases. You can find deductibility codes and their contribution limits here.
How to File Charitable Deductions
To deduct more than $300 of cash contributions or any amount of non-cash contributions, you need to itemize your deductions. Just be sure to check that your standard deductions are less than the itemized deductions you’re eligible to take.
If you choose to itemize, fill out Schedule A and follow the instructions to claim charitable contributions. If the total value of non-cash donations exceeds $500, you must fill out Form 8283 with specifics about what you donated to which organizations and how much the items were worth. Plus, if you use online tax preparation software like H&R Block, they will help walk you through the process of receiving the correct deduction.
Records to Keep
If you donate $250 or more at a time, you need a receipt from the organization. For smaller gifts, your canceled check or other documentation is all you need. For example, if you give a regular weekly donation of $25, you don’t need a receipt as long as you have some kind of record, even though your eventual contribution is greater than $250. You can certainly ask for a receipt for any amount donated, though. Many organizations send you a total at the end of the year.
If your contribution level is below $250, keep your canceled check, credit card receipt, or written record from the charity. If you’re donating to an event like a 5K or walkathon, make sure you get the name of the organization sponsoring it, not the individual event. If you donated via text message, keep the phone bill or another record of the text. Simply file these records with your other tax paperwork – you don’t need to send all of these receipts and files to the IRS.
Receiving Items in Return for a Donation
Everyone loves free stuff, but when a charity offers you an item, such as a tote bag, in return for donating, you must subtract the value of that item from your charitable donation. The charity can usually tell you the value of the items you received and will likely include it on your receipt. For example, if you attend a charity fundraising dinner and pay $100 per ticket, your receipt will show your $100 donation minus the value of your dinner. Only the part of your donation that didn’t pay for the thank-you item is tax-deductible.
If you receive any intangible religious benefits, such as admittance to a ceremony or a reading performed for a relative, you should make a note of it. However, you don’t need to subtract it from your donation amount.
With text messages and online donations, it’s quick and easy to donate cash. It’s just as easy to forget the many other ways of supporting a charity or cause. And it’s sometimes harder to quantify the value of non-cash donations, especially when they have sentimental value.
These non-cash donations are often important to an organization, and they’re usually tax-deductible for you. You do not have to list non-cash donations totaling less than $500 separately. However, for total non-cash donations over $500, you must fill out and file Form 8283.
Clothing and Household Items
When you donate household items or clothing, you can only deduct the fair market value of items that are in good condition. The value of your donation is not what you paid for it, but the price the item would raise in a thrift store. While rips and dents don’t mean a charity can’t put your donation to good use, clothes and appliances that are damaged beyond repair don’t have any value when it comes to deductions. If your clothes or household items aren’t in good condition but are worth more than $500, you need a professional appraisal.
Before you donate, lay out the items and make a list of what you’re contributing. For example, list how many dress shirts, T-shirts, and pairs of sneakers or dress shoes you’ll be donating. You can visit a thrift store to see the prices of similar items, use Goodwill’s online valuation guide, or check with the Salvation Army to get general guidelines on prices. The Salvation Army list has low and high price suggestions and columns for you to note the number and total price of your items. Be honest about the condition your items are in and the prices they might fetch.
Once you have an accurate inventory, you’re ready to take your donation to a drop-off center. Get one of the center’s preprinted receipts with the name and address of the charity and the date of the donation. If you think your total donation is worth more than $250, ask for an official receipt and show them your estimate of what your donation is worth. The IRS won’t count how many socks you donated, but they may notice if your estimates are overly optimistic.
Stock or Mutual Funds
Many large nonprofits are happy to accept shares of appreciated securities, such as stocks or mutual funds. The donation value is the share price of the security on the day you donate it – that is, the day you mail it or complete an electronic transfer.
Donating a stock that has increased in value is usually a better tax move than contributing the same amount of cash, as long as you’ve held the stock for more than one year. If you donate a stock that’s worth more than when you bought it, you avoid capital gains tax and get a deduction for the entire value of the stock, not just what you paid for it.
For example, if you buy a share at $10 and donate it when its value is $100, then your donation generates a $100 deduction. If you sold the stock and donated the profit, you’d have to pay capital gains tax on $90, which would reduce the donation amount and your deduction. By transferring the share before selling, you can deduct more, and the charity gets a more valuable contribution. Depending on the charity to which you donate, the amount you can deduct may be limited to 30% of your AGI.
Keep in mind that if you donate assets you’ve held for a year or less, you can only deduct your original purchase price.
For taxpayers who are 72 or older and want to donate their required minimum distribution (RMD) from an IRA to charity, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made that opportunity permanent. These are called Qualified Charitable Distributions (QCDs). You can contribute appreciated stock of up to $100,000 held in an IRA to a charity, avoid income tax, and get a charitable deduction. Plus, it counts as your RMD for the year.
Keep in mind, the CARES Act waived RMDs for the 2020 tax year, so you can choose to keep that money in your account in 2020 without paying a penalty.
Cars, Boats, or Airplanes
If you donate a car, boat, plane, or other vehicle, you may qualify for a tax deduction. These donations are more straightforward than other non-cash contributions.
When you donate a vehicle worth more than $500 to a qualified organization, you should receive a Form 1098-C reporting the value of the vehicle. This form lists the value of the car and the date of the donation. If the charity sells the vehicle, the proceeds from the sale will also be on the 1098-C – this is the amount you can deduct as a donation.
If your vehicle is worth less than $500 and you don’t receive Form 1098-C, you can generally deduct the lesser of the vehicle’s fair market value or your basis in the vehicle. You can use the private party value from the Kelley Blue Book as the fair market value. However, if the vehicle needs significant repair, and you could only sell it for an amount less than the Blue Book estimate, then that lower sales amount is the amount of the charitable donation. IRS Publication 4303 provides more details and examples.
Art, Jewelry, Antiques, or Collectibles
Donating collectibles or jewelry can be tricky because their value is highly subjective. If you consider your items to have a value of $500 or more, you’ll need to obtain proof of their fair market value. Three common forms of proof are:
- A catalog listing the price of a similar item
- Information about a recent sale of a similar item (on eBay, for example)
- A professional appraisal
While an appraisal can be expensive, if you believe the value of your donation is $1,000 or more, it may be worth the cost to get the official assessment and the documentation that comes with it.
Mileage and Reimbursements
If you did volunteer work for a charity and used a personal vehicle or took public transportation solely for volunteering, you can deduct mileage or the cost of your public transportation as a donation to charity. The mileage you can deduct for the tax year 2020 is $0.14 per mile. You can also deduct tolls and parking fees.
Any other items you purchase for a charity while you’re volunteering are considered a donation, such as pens or painting supplies the charity needs for a project. However, the value of your time is not tax-deductible, even if you’re providing a service the organization would otherwise have to pay for.
Gift Cards and Gift Certificates
As far as the IRS is concerned, donating a gift card or gift certificate to charity is the same as donating cash. You should list these along with other cash donations and keep the same records as you would if you’d written a check.
Be Sure to Plan Ahead
When you’re planning your charitable contributions with tax deductions in mind, remember you can only deduct contributions greater than $300 if you itemize. If you don’t have a lot of other deductions – such as mortgage interest and real estate taxes – on your Schedule A, it may not make sense to itemize since your itemized deductions may be less than your standard deduction.
For 2020, the standard deduction is $12,400 if you file as single or married filing separately, $24,800 for married filing jointly, and $18,650 for filing head of household. If your total deductions from Schedule A don’t add up to more than those amounts, you’re better off taking the standard deduction.
However, if you’re near your standard deduction amount, you could choose to lump your donations into one year – donating on December 31, for example, what you would have donated the following year. This could boost your deductions over the standard deduction threshold so that you can itemize and get a tax deduction for your donations.
The following year, you might go back to the standard deduction, but the year after that, you could implement the same plan. Saving a little bit on taxes every two or three years is better than not saving at all, and being smart about the timing of your donations can help you make sure you get the most tax-saving value out of them.
Charitable contributions help you improve the world – and your tax bill. The rules can be complicated, but it’s worth your time to know what you’re entitled to deduct to get your maximum refund. If you have any questions about taking a deduction from charitable giving, you can ask a CPA through H&R Block.