Tax Deductible Donations – What You Need to Know
Well, it’s June, and you know what that means. Tax time! Yeahhh, seems strange to be saying it, but with the coronavirus creating havoc in our world, the government thought it would be okay if we pushed our taxes to July 15th (instead of the usual April 15th).
So if you’ve put off doing your taxes, now is the time to get to it!
If you want to learn how to file your taxes easily with tax software or you want a more general tax overview in our core content, we have you covered. Here we’re going to talk about deducting charitable donations. So let’s do it!
First off, what IS a deductible donation?
Tax deductible donations are the government’s way of saying thanks for being a good person and giving to charity. You’ve given away some of your hard-earned cash, so you’ve earned a little break on your taxes. Way to go!
Basically, you’re allowed to reduce your taxable income by the amount you’ve given. Which means your taxes will be calculated off of less income. And that means lower taxes. But there are a few rules to how it works. So you do need to pay some attention to what you’re doing. (Sorry, we know paying attention can be hard, but hang in there.)
Make sure the organization is qualified
In order to claim a deduction, you need to make sure the organization is “qualified”, meaning it’s a tax-exempt organization in accordance with the law.
The organization should clearly state whether or not they qualify, and you can do an official search through the IRS website. If they aren’t qualified, that doesn’t mean you shouldn’t donate, it just means you can’t claim the deduction come tax time.
Pro Tip: Just because an organization is a non-profit, doesn’t necessarily mean it will qualify as tax-exempt. So you’ll need to check first.
How much can you deduct from your income?
For the most part, the max you can deduct is 60% of your Adjusted Gross Income (AGI). Without getting into ALL the details here, your AGI is basically your annual income (including wages, investment income, business income, etc.) minus a few specific payments, like contributions to a retirement plan and student loan interest payments.
And although 60% of your AGI is the standard maximum you can deduct, you may face a lower 30% cap based on the type of organization and the type of contribution. Again, the IRS has a more detailed breakdown, which you can check out here. You should also ask the organization how much of your contribution you can deduct (they’ll know).
If you do end up exceeding the limit in any year – first of all, that’s impressive – and second, don’t stress. You’ll probably be able to carry over your contributions to future years (for the next five years or until you’ve used up your deductions).
Itemizing vs taking the standard deduction
Everything we’ve been talking about so far is assuming you’re taking an itemized deduction on your taxes. But you get to choose whether you want to itemize or take the standard deduction (whichever one will save you more money!)
If you use tax preparation software (like TurboTax), then they’ll automatically figure out whether you should itemize or take the standard. (If you’re using a free version of software, they may not allow you to itemize, which is something to keep in mind). In general, you’ll want to know what your itemized deduction would add up to and then make the call to itemize or take the standard deduction.
Roughly speaking: While the devil is in the details, typically, if you pay a lot in mortgage interest/student loan interest, property taxes, and give a lot in charitable donations, then your itemized deduction might exceed the standard. If you don’t have a lot of those, then the standard might be the way to go.
For the 2019 tax year (tax returns that are due July 15th 2020), the standard deductions are the following;
•Married and filing jointly: $24,400
•Married and filing separately: $12,200
•Head of the household: $18,350
A few other things to keep in mind
Keep track of your donations – no matter how much you give, it’s always a good idea to keep a record of your gifts. The organizations you give to should send you a receipt or confirmation. If you don’t get one for some reason, your bank statement should work too.
And if you give a cash or property donation of $250 or more, then the IRS requires you to keep a letter of acknowledgement from the organization. The letter also needs to document whether or not the organization provided any goods/services in return for the the gift, and if so, must describe what those were. Basically they want to make sure it’s really a donation, and not some funny business kick back scheme.
Get deductions for volunteering – Unfortunately you can’t deduct the value of your time spent volunteering, but you can deduct certain expenses you incurred while volunteering, like mileage to and from. So keep your receipts if you want to deduct the actual cost, or you can use the IRS standard mileage deduction, which is 14 cents/mile (as of 2020).
New for 2020! *exciting*
If you love a current update, then boy do we have a good one for you! As part of the $2 trillion coronavirus relief bill (aka the CARES Act), the government is allowing you to deduct up to $300 of donations even if you take the standard deduction. It’s called an “above the line” deduction. This goes into effect for 2020, so you would claim your tax break next spring when you file.
Make giving a part of your financial plan
While the tax deduction is a nice bonus to charitable giving, it shouldn’t be the main reason. It’s just a good thing to do. It will make you feel good (hopefully), and a lot of great organizations rely on gifts to keep doing what they do.
And no matter what you’re interested in, there are countless organizations to choose from. Which means you can always find something you support. Even if you don’t have a lot to give right now, any amount is a meaningful contribution. So get involved!