While you're probably donating to charity this giving season out of the goodness of your heart, you can also reap tax rewards at the same time; this good deed does go unpunished!
If you plan to write off some of your charitable contributions, however, you need to understand the rules surrounding them. Not all donations qualify, and you're only allowed to deduct so much from your taxable income. Below, I explain the ins and outs of charitable contribution deductions, so you don't run into any problems with the IRS, and so you don't miss out on any money-saving deductions.
What counts as a tax-deductible charitable contribution?
Charitable contributions are only tax-deductible if they are made to a qualified tax-exempt organization. Churches, volunteer fire departments, and organizations with 501(c)(3) status all qualify. But donations to for-profit companies, individuals, and political organizations do not count. If you're unsure whether the organization you'd like to donate to is tax-exempt, you can reach out to the organization and ask or use the IRS' Tax-Exempt Organization Search tool.
Your donation must be in the form of cash, investment products like stocks and bonds, or property in order to deduct it from your taxes. A pledge to donate does not count, though if you pledge to make a donation next year and you follow through, you will be able to write off that donation on next year's taxes. If you donate property, that property must be in good condition and you can only deduct the fair market value for the item, not the cost you paid when the item was brand new. Your tax preparation program may be able to help you determine the fair market value for your donated items.
Limits on charitable contributions
As a general rule, you're allowed to deduct up to 50% of your adjusted gross income (AGI) for charitable contributions. Your AGI is all the money you make in a year minus certain deductions, like tax-deferred retirement contributions, half of self-employment taxes, health savings account (HSA) contributions, and qualified medical expenses. But there are a few exceptions to the 50% rule.
Some organizations have lower limits. For example, you're only allowed to deduct up to 30% of your adjusted gross income for contributions to veterans organizations, certain private nonprofit foundations, fraternal societies, and nonprofit cemeteries. And you're only allowed to deduct up to 20% of appreciated capital gains on donated items. The organization you're donating to should know whether it is a 30% or 50% limit organization, so you can reach out to ask. Otherwise, you can look this information up using the IRS's Tax-Exempt Organization Search tool.
Don't forget the paperwork
Even if you follow all of the rules listed above, you cannot deduct charitable contributions from your taxable income without the proper paperwork to back it up. Keep a clear record indicating the organization you donated to and how much you donated. A debit or credit card statement, a bank statement, or a canceled check will do. If you're donating more than $250, you must also get a written acknowledgement from the organization you gave the money or property to. You don't need to submit this documentation when you file your taxes, but you will need to present it if you are audited, so you should hold onto it for at least six years, just to be safe.
Those who have donated more than $500 in non-cash contributions during a year must fill out Form 8283 detailing what was donated and the fair market value for each donation. If you're donating property worth $5,000 or more, you should get a written appraisal to prove the value of the items you're deducting.
Deducting charitable contributions means jumping through a few extra hoops when you file your tax return, but it's worth it if you can reduce the amount you owe to the government and support charities at the same time. As long as you follow the rules listed above, you can give freely without fear of running afoul of the IRS.