Financial Education Blog

Here’s what you need to know about tax deductible donations

Disclaimer: 7 17 Credit Union is providing this information for educational purposes only. 7 17 does not offer tax advice; please consult a qualified tax professional for matters related to your finances.

 

2020 has been a challenging year for everyone. With many people facing a wide array of financial challenges, more and more people are turning to nonprofits and charities for assistance, especially during this holiday season.

 

If you’re looking for a way to help, consider making an end-of-year donation to your favorite nonprofit or a local charity. Not only will you be helping your community, but you may also be able to take advantage of a tax deduction for your donation.

 

Tax deductible donations are contributions of money or goods to a tax-exempt organization such as a charity. Tax deductible donations can reduce taxable income. To claim tax deductible donations on your taxes, you must itemize on your tax return by filing Schedule A of IRS Form 1040 or 1040-SR.

 

How much can you deduct?

If you’re new to tax deductible donations you may be wondering how much you can deduct. In general, you can deduct up to 60% of your adjusted gross income via charitable donations (100% if the gifts are in cash), but you may be limited to 20%, 30% or 50% depending on the type of contribution and the organization (contributions to certain private foundations, veterans organizations, fraternal societies and cemetery organizations come with a lower limit, for instance).

 

How to claim tax deductible donations on your tax return

In general, itemize at tax time. When you file your tax return every year, you'll need to itemize your deductions in order to claim tax deductible donations to charity. That means filling out Schedule A along with the rest of your tax return. For the 2020 tax year, you can deduct up to $300 of cash donations without having to itemize.

 

Weigh the costs and benefits ahead of time. Itemizing can take more time than if you just take the standard deduction, and it may require more expensive tax software or create a higher bill from your tax preparer. Plus, if your standard deduction is more than the sum of your itemized deductions, it might be worth it to abandon itemizing and take the standard deduction instead. If you abandon itemizing, you abandon taking the deduction for what you donated.

 

Things to remember about tax deductible donations

Tax deductible donations must meet certain guidelines, or you won’t get the extra cash to accompany your good deed. Here’s how to make your tax year a little sweeter.

 

1. Donate to a qualifying organization

Your charitable giving will qualify for a tax deduction only if it goes to a tax-exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. Examples of qualified institutions include religious organizations, the Red Cross, nonprofit educational agencies, museums, volunteer fire companies and organizations that maintain public parks. An organization can be nonprofit without 501(c)(3) status, which can make it tricky to ensure your charity of choice counts. You can verify an organization’s status with the IRS Exempt Organizations Select Check tool.

 

2. Document your contributions

Keep track of your tax deductible donations, no matter the amount. If you made a monetary contribution, qualifying documentation includes a bank statement, a credit card statement and a receipt from the charity (including date, amount and name of the organization) or a cancelled check. If you made a contribution as an automatic deduction from your paycheck through your employer, keep copies of your W-2 or pay stubs showing the amount and date of your donation.

 

3. Don’t miss out on tax deductions for volunteering

IRS rules don’t let you deduct the value of your time or service, but expenses related to volunteering for a qualified organization can be tax deductible donations. Expenses must be directly and solely connected to the volunteer work you did; not previously reimbursed; and not personal, living, or family expenses. Your tax deductible donations can include mileage you drive to charitable events and volunteer opportunities, or mileage you used to bring items to a donation site. You can either deduct your actual expenses using receipts for gas and similar costs, or you can take the standard mileage deduction. For 2020, it’s 14 cents per mile when you use a vehicle in service of a charitable organization. Keep your receipts if you plan to deduct your actual expenses; you may need them if you're audited.

 

To see this article in its entirety and to learn more about tax deductible donations, visit https://www.nerdwallet.com/article/taxes/tax-deductible-donations-charity.