A charitable donation tax deduction might allow you to give to a good cause and lower your tax bill at the same time. And with the holiday season upon us, you might feel that now is the best time to give.
However, there are several rules to follow and boxes to check before you can deduct your charitable contributions on your federal income tax return.
But if you can satisfy IRS requirements, you may receive a gift, in the form of a tax deduction.
Charitable donations deduction: You must itemize to claim
You cannot claim the standard deduction and charitable deductions in the same tax year. That means you'll need to itemize deductions to deduct your charitable donations.
However, if your standard deduction is a bit higher than your itemized deductions, you may want to consider combining two years' worth of charitable contributions into the current tax year. With this strategy, known as "bunching," you may be able to boost your itemized deductions for the current year so they exceed your standard deduction amount.
Also, you may want to use a donor-advised fund if you're bunching donations.
- With a donor-advised fund, you make one large contribution to the fund (cash or assets) and deduct the entire amount as an itemized deduction in the year you make it.
- Money from the fund is then sent to the charities of your choice over the next few years when you're claiming the standard deduction.
What kinds of charitable contributions are deductible?
If you do itemize, you can generally deduct contributions of cash or property to charitable organizations.
- If property is donated, your deduction is generally equal to the property's fair market value.
- If you give property that has increased in value, you may have to reduce the fair market value by the amount of appreciation when calculating the deduction.
- If the property has decreased in value, your deduction is limited to the current fair market value.
- For tips on determining the fair market value of donated property, see IRS Publication 561.
Itemizers can also deduct out-of-pocket expenses paid to do volunteer work for a charitable organization.
For example, if you drove to and from volunteer work, you can deduct the actual cost of gas and oil or 14¢ per mile, plus parking and tolls. You can't deduct any amounts that are reimbursed, though.
Note: Unlike other mileage rates, the 14¢-per-mile rate for charitable travel doesn't change from year to year.
Requirements and limitations for charitable tax deductions
There are certain hoops you might have to jump through before you can claim a charitable donation tax deduction. For instance, for gifts of $250 or more, you must get a written acknowledgment from the charity stating the following:
- The amount of any cash donation and a description (but not value) of any donated property
- Whether the charity gave you any goods or services in return for your contribution.
(Note: Additional requirements for written records and acknowledgments may apply. See IRS Publication 1771 for detailed information.)
If you donate property worth $500 or more, you have to submit Form 8283 with your return. If you donate a motor vehicle, boat, or airplane worth over $5,000, you might have to get the property appraised, too. Other requirements must be satisfied, so read the Schedule A instructions carefully before claiming a charitable deduction.
The amount you can deduct can be limited or reduced, too.
For example, if you make a gift and receive a benefit in return – such as food, entertainment, or merchandise – you generally have to subtract the value of the benefit from your deduction. The deduction for cash donations is generally limited to 60% of your federal adjusted gross income (AGI). However, that percentage drops for certain types of contributions.
- If you donate property to certain charitable organizations, your deduction might be limited to 50% of your AGI.
- There's a 30%-of-AGI limit for capital gain property contributed to certain organizations.
If you're denied part of a deduction because of the above limits, you may be able to carry the excess amount over and deduct it on a future tax return (carryovers are generally limited to five years).
Check the Schedule A instructions and IRS Publication 526 for details and additional limits.
Charities accepting tax deductible donations
Even though your donation may be used for a good cause, that doesn't necessarily mean that you can deduct it. Only contributions to certain charitable organizations are deductible.
For example, you probably can't deduct a donation given through a GoFundMe page to help a local business that's struggling or a neighbor whose house burned down.
Fortunately, there's an easy way to determine if donations you make to an organization are tax-deductible charitable contributions. The IRS's online "Tax Exempt Organization Search" tool will tell you if an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
Is a QCD better than a charitable deduction?
If you're at least 70½ years old, you can transfer up to $100,000 directly from a traditional IRA to charity through a qualified charitable distribution (QCD).
Charitable donations made by qualified older adults via a QCD aren't deductible, but you can still save on taxes since QCDs aren't included in taxable income. So, you get a tax break whether or not you itemize.
Does a QCD reduce your RMD? There's an additional perk for taxpayers who use QCDs to donate to charity – QCD donations also count toward your required minimum distribution (RMD). And, again, they count as an RMD without adding to your adjusted gross income.
