Tax Implications of Charitable Donations

When you donate to certain organizations, not only does it feel good knowing you are supporting a worthy cause and helping others in need, but you also receive a nice additional benefit of lowering your taxable income.

That’s right. Charitable contributions can absolutely reduce your taxable income, meaning you get to keep more of your hard-earned money. In order to receive the full tax benefit, your donations to charity and other itemized tax deductions have to exceed the standard deduction amount for your tax filing status.

It is worth noting that a new tax law went into effect in 2018 that nearly doubled the standard deduction and limited the state and local deduction, making it more difficult for taxpayers to itemize.

Gifts As Tax Deduction

For your 2021 tax return, you can have a charitable deduction of as much as $300 or $600 for married couples who file jointly during 2021, even if you do not itemize.

The gift must be made to a charity in cash instead of to a donor-advised fund or private foundation. You would otherwise need to itemize to take the charitable deduction, which is not as common because the standard deduction doubled a few years ago.  You have the option of entering your $300 charitable deduction when you file your return. It will display on your 1040 Form, instead of your Schedule A for itemized deductions.

 Coronavirus Aid Relief and Economic Security Act (CARES Act)

As a result of the CARES Act – passed into law in 2020 – the IRS has temporarily suspended the limit on charitable contributions for the 2020 and 2021 returns for taxpayers who take itemized deductions on their tax return. When it comes to your 2021 taxes, you are able to deduct cash donations to public charities up to 100 percent of your Adjusted Gross Income. However, cash donations made to donor-advised funds and other entities are excluded from the 100 percent deduction. The amount of charitable cash contributions remains limited to

60 percent of your Adjusted Gross Income.

One new rule under the CARES Act that applies to the 2021 tax year is an additional “above the line” deduction for people filing jointly. This rule permits taxpayers who do not itemize a $600 deduction for charitable giving in cash on their jointly filed taxes.  Otherwise, for you to itemize charitable contributions when you file in 2021, you need to have sufficient deductions, charitable and otherwise, to exceed your standard deduction.

Another rule change attributable to the CARES Act permits taxpayers who do not itemize a $300 deduction for charitable giving.

Rewards for Charitable Donations

For you as a taxpayer to take a tax deduction for a charitable contribution, there are two deduction types to be aware of:  itemized deduction and the standard deduction. A standard deduction is a fixed dollar amount you are able to deduct from your Adjusted Gross Income based on your personal filing status. For an itemized deduction, you must list every item you qualify for as a deduction. You are only able to claim one of these methods, or types:  standardized or itemized deduction on your tax return.

When you donate to a qualified charity or non-profit organization, you could claim the donation as a tax deduction on your tax return.

Make sure you find out what types of organizations qualify as charitable, deductible charity-related transportation costs, and other different restrictions.

Rules for Claiming a Deduction

Must be a qualifying organization.

Charitable donations can only be made to tax-exempt, 501(c)3 organizations in order to qualify as a deduction.

You should not have any issues with obtaining proof of an organization’s tax-exempt status. A typical way of receiving proof is by the organization providing you with their Form 990.  As a cautionary note, make sure you protect yourself from being taken advantage of by scammers.

“You might get a call from someone who says, ‘We started this for the benefit of earthquake victims,’” says Steve Parrish, co-director of the New York Life Center for Retirement Income at The American College of Financial Services. “Ask for proof of its application for tax-exempt status. Requiring confirmation of tax-exempt status is an easy way to make sure grifters aren’t coming in and telling you it’s a great charity.”

There might be some instances where legitimate causes will not qualify as a charitable donation. An example of this scenario is if you donate money through GoFundMe and other platforms typically used for fundraising efforts. These entities are not tax deductible.

The IRS does offer a tool, Tax Exempt Organization Search, where you can confirm the status of a tax-exempt organization. Also available are GuideStar and Charity Navigator where you can obtain this same information.

You must document your charitable contributions.

You need to keep accurate records of all charitable contributions you make in the event of an IRS audit. The IRS makes it a requirement for you to keep records of any cash contributions, and this could include a cancelled check, a bank statement, credit card statement, or written statement from the charitable organization showing the date of the contribution, as well as the amount of the contribution, and the name of the organization you donated to.

For any contributions made via text message, a phone bill will be adequate as a record of the contribution provided that the bill stipulates the amount, the date on which the donation was made, and the name of the organization to which you made the donation.

Be aware that if a single charitable contribution is more than $250, you are required to obtain written acknowledgement from the qualified organization. Each contribution counts as a separate itemized deduction.

Additionally, if your total deduction for all non-cash donations surpasses $500, you have to complete a Form 8283, Section A.  Also, if your contribution of non-cash property is worth more than $5,000, you could be forced to secure a third-party appraisal of the value. If this procedure is so, you must also complete Form 8283, Section B.

Organizations Eligible for Tax-Deductible Donations

The IRS considers the following types of organizations to be eligible for tax-deductible donations:

Federal, state and local governments for contributions meant for the public good.

Nonprofit schools and hospitals.

Churches, synagogues, temples, mosques, and other religious organizations.

War veterans’ groups.

Organizations such as the Salvation Army, American Red Cross, Goodwill Industries, and United Way.

You can gain access to a complete list of qualified organizations by going to IRS Publication 526.

Additional Tax Deductible Contributions

You are able to claim tax deductions on appreciated stocks and contributions to organizations that provide disaster relief.

Cash and property are not the only things you are able to donate to charity for a tax benefit. Donations of appreciated stock could also offer you outstanding tax savings.  You are permitted to donate any stock that has increased in value, if you have owned it for longer than one year, and you avoid any capital gains tax. However, be aware that if you sold this appreciated stock for cash, you must pay tax on the amount of appreciation. Also, if you donate appreciated stock, you are able to deduct 100 percent of the value on your tax return.

Your contributions to organizations that offer overseas disaster relief are considered tax deductible if the group you are making a donation to is based in the U.S., and has complete control over the distribution of donated funds. Prior to making that donation, verify that the charitable organization is qualified and always keep records of these donations.

Know the Tax Rules Before Making Charitable Donations

As we have covered, when you make charitable contributions, you can indeed lower your taxable income. But it behooves you to be fully aware of the tax implications of your charitable contributions.

It is also helpful for you to be aware of organizations you are donating to, whether they qualify as a tax-exempt, 501(c)3 entity, where they are based, and what control they have over the use of their charitable contributions. 

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