Donors with charitable hearts do not donate to their favorite causes just to take advantage of tax breaks. It is the financial health of the charity that matters, as well as the mission the charity wants to accomplish. However, charitable donors should understand the tax implications of their donations.
Tax deductible charitable donations contribute money and/or goods to an organization that qualifies as tax-exempt. Donating to a qualified tax-deductible organization can decrease the amount of money that is taxed as income. For getting the most tax benefits out of charitable donations, you have to itemize your charitable donations by filing Schedule A with IRS Form 1040 or 1040-SR
For the tax year ending on December 31, 2021, you can deduct up to $300 of donations without having to itemize the donations on a tax form. Married couples that file a joint tax return can donate up to $600 to a qualified charitable organization without having to itemize the donations on Schedule A. The $300 and $600 values of non-itemized charitable donations are referred to as “above the line” tax deductions.
Cash and Property Donations
Donors who itemize charitable donations can donate up to 60 percent of their adjusted gross income (AGI). Donations valued below $250 must include a bank record that verifies the donation. A canceled check or a credit card statement displaying the donation is a sufficient record for the IRS. If you donate cash exceeding $250, the charity that receives the donation must confirm the donation by submitting a notarized written statement.
Although you can deduct up to 60 percent of your AGI donated to an eligible charity, you might face a limit that is established below the 60 percent threshold. The amount you can deduct depends on the type of contribution, as well as the organization that receives your donation. Certain contributions, such as those made to private foundations, cemetery organizations, fraternal societies, and veterans groups, must fall under a lower limit than the 60 percent for AGI.
Capital Gains Property
If you donate the gains earned on personal property, you can deduct the full market value (FMV) of the capital gains. However, you can contribute a capital gain that is valued at no more than 30 percent of your AGI. The IRS defines a capital gains property as the long-term capital gain on a property if the owner had sold the property at full market value on the day the owner donated the property to a charitable organization.
Keep Meticulous Records
No matter how much money and/or property you donate to charitable causes, make sure to document everything and maintain accurate records both in paper and digital form. For cash contributions, make copies of bank records and credit card statements. If your cash contributions come from automatic payroll deductions, save copies of your W-2 statements to present as evidence, if required by the IRS. A written confirmation from the charity that you donate property fulfills the record-keeping requirement for capital gains property.
Ernst Wintter & Associates provides California nonprofit audits, broker dealer audits, tax services, and 401(K) audit services. Contact us for more information.