It may be better to give than to receive, but receiving a tax break for their charitable giving is a good incentive for many taxpayers. According to Giving USA, total charitable contributions in 2019 reached an all-time high of $449.64 billion, with the majority of those donations coming from individuals and the balance coming from foundations, estates, and corporations.
Many charitable organizations were concerned about how the Tax Cuts and Jobs Act of 2017 (TCJA) would impact taxpayers’ willingness to keep giving. While tax reform didn’t significantly change the charitable giving deduction itself, it substantially increased the standard deduction. As a result, fewer taxpayers itemized deductions on their tax returns.
Despite fewer taxpayers having a tax incentive to donate to charities, charitable giving rose from 2017 to 2019. And a new option to deduct some cash contributions for non-itemizers could encourage even more giving.
Overview of Tax Deductions for Charitable Contributions
As with most tax deductions, there are a lot of rules and limitations you need to be aware of. Here’s a rundown.
Taxpayers can deduct charitable contributions made to IRS-qualified charities. To be eligible, the organization must be classified as a tax-exempt organization.
Not all nonprofit organizations qualify. For example, civic organizations and some sports groups may be organized as nonprofits but not eligible for tax-deductible donations. Also, you cannot claim a deduction for donations to individuals, political organizations, or candidates. To be sure you’re giving to a qualified organization, use the IRS’s tax-exempt organization search tool.
Your deduction for total charitable contributions can’t exceed 60% of your adjusted gross income (AGI) for the year. AGI is your total taxable income for the year, minus certain adjustments to income, such as contributions to a health savings account or IRA or the student loan interest deduction. On your 2020 Form 1040, your AGI is on Line 11.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily suspended the 60%-of-AGI limitation. For the 2020 tax year, you can deduct cash contributions of up to 100% of your AGI.
However, a lower limit applies for donations to some charitable groups, such as veterans’ organizations, fraternal societies, and certain private foundations. For these organizations, the limit is 30% of AGI. The tax-exempt organization search tool shows whether a charity is a 60% or 30% organization.
As with other tax deductions and credits, you must keep records of your charitable donations in case you get audited. The kinds of records you need to keep depend on whether you make your donation in cash (including checks or credit card donations) or noncash (such as used clothing and household goods).
- Cash Donations Less Than $250: Bank record (such as a canceled check or credit card statement) showing the date of the donation, the name of the charity, and the amount of the donation.
- Cash Donations of $250 or More: Written acknowledgment from the charitable organization, such as a receipt or thank-you letter. You must receive this acknowledgment no later than the date you file your tax return for the year you contributed.
- Noncash Donations Less Than $250: Receipt from the organization showing its name and address, the date of the donation, and a description of the item donated.
- Noncash Donations of $250 to $500: Written acknowledgment from the organization showing its name and address, the date of the donation, and a description of the item donated. The acknowledgment must also indicate whether the organization gave you any goods or services in exchange for your donation, as well as an estimate of the value of those goods or services.
- Noncash Donations of $500 to $5,000: The same written acknowledgment as the donations of $250 to $500 plus records showing how you acquired the property, the approximate date you got the property, and your cost basis.
- Noncash Donations Over $5,000: The same written acknowledgment as the donations of $250 to $500 plus a written appraisal of the donated property from a qualified appraiser.
For more information on charitable contributions, check out IRS Publication 526.
Claiming a Deduction for Charitable Contributions
If you meet the requirements outlined above, there’s typically one more hurdle you need to clear to take advantage of the tax benefits of donating to charity. In prior years, you had to itemize deductions on Schedule A.
When you file your tax return, you have the option to itemize deductions or claim the standard deduction. The standard deduction is a fixed dollar amount, while itemizing involves adding up your actual expenses for things such as out-of-pocket medical and dental expenses, home mortgage interest, state and local taxes, and contributions to qualified charities.
If your total itemized deductions are greater than the available standard deduction for your filing status, you can itemize to get the larger tax benefit. If you’re filing your taxes through tax preparation software like H&R Block, they can help you understand whether you can itemize your charitable donations or should claim the standard deduction.
In 2020, the CARES Act provided a temporary option to claim an “above-the-line” deduction for up to $300 in donations to qualifying charities. Above-the-line deductions are valuable because you don’t have to itemize to claim them. They also reduce your adjusted gross income, which can open up other deductions or tax credits. The $300 deduction only applies to cash donations — not donations of property.
To get a tax break for noncash donations or cash donations over the $300 limit, you must itemize.
How Tax Reform Impacts Charitable Contribution Deductions
The TCJA nearly doubled the standard deduction available to every filing status. In 2017, the standard deduction was $6,350 for single filers and $12,700 for married couples filing jointly. For the 2020 and 2021 tax years, the standard deductions are:
|Married Filing Jointly||$24,800||$25,100|
|Married Filing Separately||$12,400||$12,550|
|Head of Household||$18,650||$18,800|
As a result, fewer taxpayers have enough itemized deductions to exceed the standard deduction.
To understand how this might impact you, consider an example. Taylor and Priya are a married couple who file a joint return. On Schedule A, they listed the following itemized deductions:
- State Income Taxes: $6,500
- Real Estate Taxes: $3,500
- Home Mortgage Interest: $6,450
- Gifts to Charity: $5,000
- Total Itemized Deductions: $21,450
Taylor and Priya’s total itemized deductions were $21,450. In 2017, the standard deduction available to them was $12,700, so it benefited them to itemize rather than claim the standard deduction.
For the 2020 tax year, Taylor and Priya expect their available itemized deductions to be about the same as in 2017. However, with an available standard deduction of $24,400, it doesn’t make sense for them to itemize. They’ll reduce their taxable income by $2,950 by claiming the standard deduction rather than itemizing. Knowing they won’t get a tax break for charitable contributions, will Taylor and Priya still donate $5,000 to charity? Maybe they’re passionate about the organizations they support and will continue to donate, but maybe not.
A Strategy for Deducting Charitable Contributions
Plenty of people donate to charity every year without itemizing deductions and claiming a deduction for their giving. But if you’re close to being over the standard deduction for your filing status, you can bunch your donations into one tax year. By doing so, you give the same amount you would have over multiple years, but your donations for the year are enough to qualify for the charitable contribution deduction.
Going back to our example, Taylor and Priya typically donate $5,000 per year to their favorite charities. If they wanted to take advantage of the bunching strategy, they could donate $10,000 every other year. Assuming their other itemized deductions stayed the same for 2020, their Schedule A would include the following:
- State Income Taxes: $6,500
- Real Estate Taxes: $3,500
- Home Mortgage Interest: $6,450
- Gifts to Charity: $10,000
- Total Itemized Deductions: $26,450
For 2020, they would reduce their taxable income by $2,050 by itemizing rather than claiming the $24,400 standard deduction. In this way, they could maximize their tax savings by itemizing in one year and taking the standard deduction the next.
If you’re planning to claim more than $300 in deductions for your charitable contributions, do a rough tally of your itemized deductions. If the total doesn’t top the standard deduction for your filing status, you may want to consider bunching donations for two or even three years into one year or looking at other strategies for reducing your tax bill without itemizing.
And remember, even if you can’t get a tax break for your giving, there are other reasons to donate to your charity of choice. It can make you feel happier and more fulfilled, improve the lives of others, and set an example of generosity for your friends and family. Those are the real reasons it’s better to give than to receive.