This article was fact-checked and verified by Katherine Varraveto, CPA. However, this article does not constitute tax advice and was written for educational purposes. For actual tax advice please consult your own CPA.
What’s ahead:
- What is the importance of charity?
- Do you get a tax break for donating to charity?
- How to get a tax break for donations (consult your tax advisor)
- How much do charitable donations reduce taxes?
- Charitable donations cash deduction calculator
- When is the cut-off for tax break donations?
- Carry forwards
- What else can you claim on your tax return?
- When is the tax deadline for the 2020 tax year
- How can Spiral help with your financial goals?
- Key takeaways
Getting involved in charity is arguably one of the noblest human character traits. Life is also about the give and take.
So while you give your money to charity, what do you take from the act? Is it only about getting tax break for donations or is it more than a return?
According to the statistics of a study conducted by the Tax Policy Center, only about 30% of taxpayers itemized for deduction in 2018; this figure decreased in subsequent years which correlates to the increase in taxpayers claiming standard deductions.
Most taxpayers have decided to settle for only the standard deduction. This may not be unconnected to the fact that itemizers of charitable donations have to provide evidence of such donation and being a voluntary act, donors may not feel the importance of keeping the receipts.
Also, the extra paperwork that needs to be completed before claiming itemized deductions and more recently due to changes made to the tax code that eliminated a number of deductions and raised the standard deduction, itemization became impractical.
Another study published by the Tax policy center also showed that about 93% of all itemized deductions in the 2018 filing year comprised income earners above $500,000.
This does not necessarily mean the lower-income earners are not eligible for such deductions.
The increase in standard deduction and removal of some deductibles has drastically reduced the number of people filing for itemized deduction.
Let’s dive deeper.
What is the importance of charity?
Giving to charity has significant importance that is not limited to tax breaks. It is beneficial to give to charity because of the:
- Civic responsibility
- Community responsibility
- Personal fulfillment
Again, giving is a personal decision, but while you have the intention and the capacity to give, some organizations have the structure, the reach, and platform to help put your charitable donations to better use.
These organizations are mostly set up to identify the entities that need the funds the most and distribute them accordingly.
Those assets you no longer need and are just taking up space in your house; some charitable organizations are in need of those assets or have identified people in need of them.
So long they are not useless. So instead of just allowing those assets to rot away, you can arrange them and donate to a qualified charity that will either put them to better use or sell off to raise funds for charity.
You are entitled to keep the evidence of the value ascribed to such assets and use as evidence while filing your Schedule A for Itemized deductions.
In a case where the value of such assets exceeds your standard deduction, you kill two birds with one stone; get rid of unwanted properties and, at the same time, get some tax relief in the process. Why not give to charity?
Do you get a tax break for donating to charity?
Yes, but not in all cases. Some specific rules and guidelines need to be followed to ensure you qualify for the tax break. Some of these rules include:
- Your cash donations on Schedule A must not exceed 60% of your adjusted gross earnings.
- Your donations must be paid to a charitable organization.
- Find out which charitable organizations qualify for tax deductions by accessing their status on IRS’s Form 501(c)(3).
- Your donations must be made within the taxable year for which you are filing.
- Receipts and evidence of donations must be well documented.
How to get a tax break for donations (Consult your tax advisor)
Money and goods donated to qualified charitable organizations are eligible for a tax deduction of up to about 60% of your adjusted gross income according to the Jobs Act, P.L. 115-97.
However, some steps are required in order to claim the itemized tax deductions.
- Complete your Schedule A using evidence of money donated/spent: you must keep proof of donations or money spent while doing charity work. In most cases, this will be donation receipts. You will also want to track the actual value of goods donated and the conditions in which they were donated.
- Ensure your donations are directed to 501(c)(3) designated organizations.
- Familiarize yourself with annual deduction limitations and how to carry forward the deduction if it exceeds the annual limitation.
- Ensure your total calculated itemized deduction exceeds the standard deduction; you can check the IRS’s latest guidelines on itemizing your tax deductions.
- Maintain proper documentation of charitable donations, including receipts, value of properties and goods, and the charities to which these items are donated.
- Retain written acknowledgment of donations from the charity and other requirements from the IRS.
- Lastly, you might consider engaging a tax professional to help guide you through the process.
How much can you claim in charitable donations without receipts?
According to the CARES act enacted in March 2020, you can get $300 tax relief for individuals and $600 for married couples from your charitable giving without receipts.
To take the burden of keeping these records off you, and ask your bank about Spiral’s Giving Center where you can track donations for tax returns. The Giving Center tracks all your donations so you can easily see who you’ve given to, and how much.
Do you get a tax write-off for donating?
Generally, you are entitled to up to a 60% deduction from your AGI. However, the recent CARES act legislation has made it possible to claim up to 100% of adjusted gross income (cash donation to qualified organizations), available only till the end of 2021, you may also be limited to 20, 30, or 50% of your AGI, depending on the organization and the type of contribution.
For context, if you donate up to 60% of your AGI to a charitable organization not qualified by the IRS under section 501(c)(3) of the Internal Revenue Code, you are not entitled to any tax deductions for such charitable donations.
You are expected to do your due diligence to be on the safe side of the law if you intend to itemize for deductions later. You also need to identify the organization’s tax deduction limit.
For qualified organizations, the tax deduction limit is 60%; for private foundations, the tax deduction limit is pegged at 30%.
How much do charitable donations reduce taxes?
As stated above, how much charity is tax deductible depends on your circumstances, but generally you can get tax relief on up to 100% of adjusted gross income (AGI) in 2021 and 60% of AGI according to the normal rules effective before and after the pandemic.
This means you will only be taxed on the remaining 40% of your AGI if you give up to 60% of your AGI to charity.
This figure may be higher or lower, depending on the donation medium and the organization.
Charitable donations cash tax deduction calculator
Calculating your tax deduction can be straightforward when you donate only cash. However, it’s more complicated when you donate other assets.
Here are some steps you need to follow in order to calculate your total charitable contributions tax deduction:
- Total all of your cash donations throughout the year;
remember to keep receipts and invoices as evidence of such donations. In the case of electronic cash donations, download or have a screenshot of the evidence for future use.
- Calculate the estimated value of the properties donated within the year.
You are required to understand and complete the requirements outlined in IRS Form 8283, Noncash Charitable Contributions, for property donations above $500.
A complication involved in tracking property donations includes determining an agreeable value to the IRS. Getting a fair market value does not work in all situations.
For example, properties with minor wear and tears should be valued at the conditions in which they were donated, not the normal market value of similar properties.
In cases where the value of such property cannot be predetermined, the value at which the charitable organization sells the property should be used.
In such cases where those properties are not sold, a written estimated value of such property should be obtained from the charitable organization.
- Enter the value of the cash donations and property donations separately on your Schedule A after which you will sum the two together to obtain a total donations figure.
- Review your figures and determine whether any additional actions or forms are required.
When is the cut-off for tax break donations?
All donations made to recognized charitable organizations within a particular year are potentially eligible for tax deductions for that year.
Say you made a donation on January 1, 2020, and another on December 31, 2020, both donations are deductible in the 2020 tax return.
However, in cases where the total donations made in that year exceeds 100% of your adjusted gross income (AGI) in 2020 and 2021 and 60% in subsequent years (provided the legislation is unchanged), you should carry forward the excess charitable contribution deduction to the following year.
Carry forwards
Excess charitable contribution deductions from the previous year can be entered into the following year’s tax return.
Such excess donations are eligible to be carried forward for not more than five years.
For example, if you made a total of $65,000 donations to recognized charitable organizations in 2020 and your AGI is $100,000, you are eligible to file for the full amount donated in your Schedule A in 2020 and 2021, however, after this year, your tax deduction will be limited to $60,000, and $5,000 is carried forward.
What else can you claim on your tax return?
There are numerous other benefits, in addition to charitable contribution deductions, that you can claim on your tax return.
These include but are not limited to: student loan interest deduction, adoption credit, home office deduction, education expenses deduction, saver’s credit, etc.
When is the tax deadline for the 2020 tax year?
On March 17, 2021, the Department of Treasury Internal Revenue Service extended the individual income tax filing deadline until May 21, 2021, instead of the regular April 15th deadline.
This gives enough time to get the paperwork. Individual taxpayers who are due for a refund are expected to file immediately.
However, tax payments due April 15th are expected to be paid before the deadline to avoid penalties and interest.
How can Spiral help with your financial goals?
Spiral is the pioneer of the Impact-as-a-Service™ platform that helps banks and financial institutions easily embed sustainability, social impact, ESG, and CSR into their businesses. Their mission is to empower 10,000+ U.S. financial institutions and millions of people to contribute to a better world.
Key takeaways
- You are eligible for tax deductions (depending on the amount) for donating to qualified charitable organizations
- You can donate any valuable you deem useful
- Keep a record of all donations and evidence of the calculated fair value of property donations for filing
- Know the qualification status of the organization you are donating to
- Individual filers are eligible for up to $300 in tax deductions for charitable donations in 2020 without having to itemize your donations
- You can carry forward excess donations that exceed the maximum tax-deductible donations of the organizations you donate to
- You are expected to have filed your income tax for the 2020 financial year before May 21, 2021
