Charitable contributions are a very misunderstood portion of the tax return. Every year, I have several clients who either try to deduct donations they can’t, or don’t realize they don’t qualify for any deductions for charitable donations.
Obviously donating to charity should be about more than maximizing your tax deductions, but there’s no reason your donations can’t do both. When done right, charitable donations can be a true win/win experience. You help those in need and create a decent size tax deduction for yourself.
As we approach the largest donation season, November and December, here are some guidelines to make sure your charitable donations are also helping you on your tax return:
1. You Can Only Claim Charitable Donations if You Itemize Your Deductions
Everyone starts out claiming the standard deduction on their tax return. If you can beat the standard deduction with your itemized deductions, you can take that instead. That means if your itemized deductions are lower than your standard deduction, all your itemized deductions, including charitable donations, are meaningless.
Typically, home mortgage interest is the only way to have enough deductions to itemize. This means for most people, unless you own your home and have a mortgage on it, you probably won’t be able to deduct any of your charitable donations.
2. You Must Actually Donate Cash or Property in the Current Year
This one may seem self-explanatory, but many people make pledges or promises to donate in the future and try to deduct it as an actual donation that year.
In order to be a qualified charitable donation, you have to actually donate the property or cash during that year.
3. You Must Donate to a Qualified Tax Exempt Organization
In order to be used as a charitable donation on your tax return, you must have donated the cash or property to an organization who has received 501(c)(3) tax-exempt status from the IRS. If you are donating to a church or other religious organization, this rule does not apply.
In order to claim your donation on your tax return, be sure you are donating to a qualified organization.
4. Donations to Individuals Don’t Count
Donations made to individual people do not qualify for tax deductions. This means the $5 bill you gave to the homeless man on the corner can’t be deducted. Neither can the $1,000 you donated to a friend to help pay medical bills.
There is actually one way around this rule. If you are donating to an individual to help pay medical or tuition expenses, you can claim the deduction if you pay the hospital or school directly, instead of just giving the money to the individual.
5. Non-Cash Donations Over $500 Must be Documented on Form 8283
If you donate non-cash items, such as furniture or clothes, and the value is over $500, you must document each item donated on form 8283.
Non-cash donations are easier to fudge, so the IRS requires additional documentation.
6. You Must Keep Adequate Records
As with any other tax deduction, you must maintain documentation to prove your donations in the event of an audit. Adequate records could include a receipt from the recipient, a bank statement or cash receipts.
Maintaining your records protects you in case you are audited.
7. Total Donations are Limited to the Following Percentages
Cash Contributions= Limited to 50 percent of your adjusted gross income.
Property Donations= Limited to 30 percent of your adjusted gross income.
Appreciated Capital Gains (such as stock)= Limited to 20 percent of your adjusted gross income.
In addition to the guidelines above, there are certain donations that are never allowed to be used as charitable contribution deductions. They are:
- Donations to political parties, political campaigns or political action committees.
- Fees or dues paid to professional associations.
- Contributions to labor unions, chambers of commerce, or business associations.
- Contributions to for-profit schools and hospitals.
- Contributions to foreign governments.
- Fines or penalties.
- The value of your time for services rendered to a non-profit organization.
The More You Give the More You Get
Charitable giving should be about more than tax breaks. There are plenty of people and organizations out there who can use the help of those more fortunate. But when it comes to qualified charitable donations, the old saying is true, the more you give, the more you get back in your taxes.
By following these rules and guidelines you can make sure that your charitable donations are also easing your tax burden this year.