Many people start to increase their charitable giving towards the end of the year. There are two reasons for this: the holidays tend to improve people’s generosity, and they want to get those tax deductions claimed before the end of the year.
Charities also tend to accelerate their campaigns toward the end of the year because they know about those two phenomena. Between these three factors, an increase in giving at the end of each tax year is typical.
If you plan to make donations this year, you’ll need to know how charitable contributions can be claimed on your tax returns. We’ll also cover important tips to help ensure your donations make as much of an impact as they can, both for your own finances and for those of the charities you’ve donated to.
1. Only Donations Made To 501(C)(3) Charities Qualify
This rule is the first and most important thing to note when filing taxes that claim charitable donations as deductions. If you have donated to a charity that is not registered as a 501(c)(3) nonprofit with the IRS, then donations to them may help the charity and make you feel good, but they won’t be deductible on your tax return. This distinction is vital because many legitimate nonprofits aren’t 501(c)(3). For example, many social clubs, fraternal societies, political organizations, business leagues, and other entities qualify for nonprofit status, but not 501(c)(3).
If you are concerned that your donations may not be deductible and need to verify before filing, you can search the IRS web site’s list of qualified charities. If the charity of your choice is on the list, you can rest assured knowing that your deduction will count and won’t be red-flagged by the IRS. Some qualified institutions include:
- American Red Cross
- Religious Organizations
- Nonprofit Educational Agencies
- Organizations that Maintain Public Parks
- Volunteer Fire Companies
2. Itemized Charitable Contributions and “Above-the-Line” Deductions
Charitable contributions are a form of itemized deduction, so you will need to itemize all your other deductions as well to claim the charitable ones. If your total itemized deductions, including qualified charitable donations, do not exceed the standard deduction, this may not make sense.
Beyond itemized deductions, there are others that can be declared even if you can’t itemize them. These are called “above the line” deductions. These are expenses deducted to calculate your adjusted gross income (AGI), which is different from itemized dollar amounts deducted from your determined AGI. Retirement plan contributions, health insurance premiums, and contributions to Health Savings Accounts are some standard above-the-line deductions. Of course, there are limitations and rules to be followed, so be sure to have everything checked by your tax professional.
3. Donations Over $250 Need to be Acknowledge in Writing
This requirement is why many charities send out annual giving statements at the end of the year. It is common to donate to charities using cash or checks because it is easy and convenient. With any donation, you need to keep records to prove that you did so.
If you gave more than $250 to anyone charity, you would need them to show in writing that they received the donation and that they gave you nothing in return. If you received anything from the charity in exchange for the gift, you would need to deduct the value of what you received from the amount given to come up with the net amount you can deduct on your taxes.
4. Donated Property Needs Additional Documentation
If you donated any property to charity, you could deduct its fair market value from your income. However, if the donation exceeds $500 or more, you will need to complete IRS form 8283, which asks you for some standard information about the donated property. If your property donation deduction claims a value of more than $5,000, you will need a qualified appraisal of the property to verify its value is what you claim it is. The one notable exception to this rule is if the property is composed of publicly traded securities, such as stocks, bonds, or fund shares.
Donating vehicles and other property that falls into certain categories also require additional verification to prevent fraud. Most charities can help answer any questions you have about verifying such donations properly so you can claim the deductions.
5. Retirees Can Make Charitable Donations Directly From an IRA
If you are over 70.5 years of age and have a funded IRA account, you can make donations to charity directly from the IRA. These donations can total up to $100,000. Note that donations made directly from your IRA are not tax-deductible.
You will not have to pay any income tax on the amount donated, for example, if you have a traditional IRA where you usually would have to pay income tax on withdrawals. Because traditional IRAs have a required minimum distribution (RMD) that you must draw each month, charitable donations can be an excellent way to have unneeded retirement withdrawals go toward a good cause while satisfying the withdrawal requirements of the IRS.
Give Smartly So You Can Maximize Your Deductions
Donating to charity is more than a financial matter. By making sure you understand the rules, you ensure your donations are appropriately deducted on your tax return, and you can still contribute to a cause you feel is worthy.
If you have any helpful tips of your own to share that pertains to charitable contributions and tax filing, please share them with others in the comments below!