The holidays are all about giving, and this year the IRS is giving taxpayers a special bonus for donating to their favorite charities. Before you spend all your Christmas cash delivering gifts to every charity you come across, take a look at the following items to ensure that your charitable donations will be tax-deductible.
Don't skip due diligence
If you want to receive a deduction for your charitable contributions, you must do your homework. It's easy to let your heart guide you when you are passionate about a cause, but you want to let your head direct you so that you don't end up giving away money to a fake charity. Deductions are only permitted for qualified charities that are tax-exempt 501(c)(3) organizations. It's important to understand that there are other types of tax-exempt organizations that don't allow for deductible donations, such as 501(c)(4) social welfare organizations.
Examples of qualifying organizations include:
- Churches, temples, mosques, and other religious organizations
- Most nonprofit charitable organizations
- Most nonprofit educational organizations
- Nonprofit hospitals and medical research organizations
- Civil defense organizations
You can check the IRS Tax Exempt Organization Search before you make contributions to ensure that the organization meets the requirements for you to qualify for year-end deductions.
If you're trying to contribute to a political campaign, you can forget about a deduction. The IRS has made it clear that those donations are not tax-deductible.
Itemize deductions to claim your rewards
There are two options for tax deductions: standard or itemized. The standard deduction is a fixed amount that individuals can subtract from their income based on filing status. Itemizing deductions is the process of listing all qualified expenses that can be deducted from your income. You can either choose the standard or itemized deduction, opting in for the deduction amount that is greater so that you can reduce your taxable income.
Since the standard deduction has almost doubled since 2017, most Americans benefit from the simple process of claiming a standard deduction instead of pulling together tons of paperwork to itemize deductions. But if you have enough in itemized deductions -- including deductible charitable contributions -- for it to make sense not to take the standard deduction, then donations can save you some extra money.
The Tax Cuts and Jobs Act of 2017 increased the charitable contribution deduction limit for cash gifts from 50% to 60% of adjusted gross income (AGI). For 2020, the AGI limits have been temporarily suspended and you can deduct qualified cash contributions to public charities up to 100% of your AGI on Schedule A. Now, you can save tons of money on your tax return and make a difference by donating to your favorite charity.
Standard deductions come with a charitable twist in 2020
Good news! Standard deduction recipients will no longer be left out of the tax-deduction giving circle that is typically reserved for those who itemize their deductions on their tax return. A special temporary provision under the CARES Act allows taxpayers who do not itemize deductions to easily deduct cash donations up to $300 that are made to qualifying charities in 2020.
This cash donation will be classified as an "above-the-line" deduction when individual taxpayers file their taxes in 2021, reducing both AGI and taxable income. All this means is that you will get rewarded for your charitable contributions by paying less in taxes and keeping more money in your pockets.
This special treat won't last forever. You have until Dec. 31, 2020 to donate to a qualified charity and receive a tax deduction. You cannot carry forward any amount that exceeds the $300 to future tax years. Also, the $300 charitable contribution amount for non-itemizers is limited per filing unit -- it doesn't matter what your filing status is.
A few lesser-known donation considerations
While most people automatically default to cash donations to charities, there are other ways to contribute that could increase your gift amount and lead to bigger tax benefits. Review the different considerations for non-cash donations and non-public charities to determine the best options for you.
If you're trying to follow Warren Buffett's charitable giving style, you'll most likely be interested in donating stocks to charities. With the recent stock market highs boosting portfolios, donating appreciated long-term stock investments directly to charity has become an appealing option. When you donate stock you've held for over a year, you can deduct the fair market value of your investment and bypass the long-term capital gains tax of up to 20% -- potentially boosting the net tax benefit from your gift. Of course, you have to watch out for the ceilings on this incredible opportunity because the IRS limits the deduction to 30% of your AGI. The bright side is that you're able to carry forward unused deductions for up to five years.
Another smart way to maximize your charitable impact is by giving appreciated stock to a donor-advised fund. These 501(c)(3) public charity investment vehicles allow you to take an immediate tax deduction for the full amount of the gift without the pressure of giving all the money to charity at that moment. You can disburse the funds to the charities of your choice -- whenever you want -- and allow your funds to be invested in assets that grow tax-free. Don't forget that your contribution is irrevocable -- you can't get it back. But it's the perfect gift option for accelerating charitable deductions and making an impact over time.
Private foundations are a great giving tool for wealthy donors who seek more control and flexibility through a tax-exempt nonprofit organization. It's easier to create a lasting legacy because your family members can be employed, serve as members of the board, and have full control over grant-making decisions. If you donate publicly traded appreciated stock to a private foundation, you can claim a deduction equal to the fair market value of the asset -- limited to 20% of your AGI.
Obtain documentation to deduct
If you want to deduct contributions, the proof must be in the papers -- not the handmade receipts you created. You need to maintain records and obtain documentation from the charitable organization to support your contribution, especially if the amount is over $250.
If you received anything in exchange for your donation, that can count as a quid pro quo contribution and needs to be documented. For example, if you gave a donation of $400 and received concert tickets worth $150, the charitable contribution portion of the payment is $250. You must obtain a disclosure statement from the organization if the quid pro quo contribution is more than $75.
Five minutes of your time ensuring you have the appropriate documents will save you time and money during tax season. It's all worth it -- especially when you realize you're using your money to make a difference that can last beyond a tax deduction. The tax-savings benefits are just an added bonus that will give you more opportunities to give back throughout the year.