What’s new for deducting charitable donations?

Two young women volunteers helping a charity build houses. Their charitable donations could net them a tax deduction.Image: Two young women volunteers helping a charity build houses. Their charitable donations could net them a tax deduction.

In a Nutshell

Doing good isn’t just the right thing to do — it can have tax benefits, too. Deducting a charitable donation can help increase your tax refund this year and possibly even for years to come.
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Knowing how to properly deduct charitable donations can lower your taxable income and increase your tax refund, if you’re owed one.

When donating to charity, you might not expect to get something in return other than good feelings. But your good deed could also net you a tax deduction. And thanks to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, more people will be able to reap the tax benefits of donating to charity.

The CARES Act aims to boost charitable contributions by creating a small “above-the-line” tax break for annual cash contributions starting in 2020. It also allows itemizers to deduct much more of their charitable contributions for the 2020 tax year.

Deducting a charitable donation isn’t always easy, though. Depending on how you donate and how much, different rules apply. So, it’s important to know how to do it properly and to keep records in case you get audited. Here are some tips to get you started.

1. Know what you can deduct

Under the CARES Act, taxpayers who choose the standard deduction can take advantage of a brand-new “above-the-line” tax deduction for the 2020 tax year. This means you can write off up to $300 in cash donations every year ($600 for joint filers) to qualifying charities, and you don’t have to itemize deductions to take this charitable deduction.

“A charitable contribution is a donation or gift given to a qualifying charitable organization,” says Shan-Nel Simmons, an enrolled agent and former IRS revenue agent. As an enrolled agent, Simmons is federally licensed to represent taxpayers in collections, audit and appeals actions before the IRS. “Money, property including vehicles, and out-of-pocket expenses paid while servicing a qualified charitable organization are all examples of deductible contributions.”

With the spread of the coronavirus, many charities are helping those affected by the pandemic. Making a cash donation to one of these organizations can be an easy way to help out, but you must donate to a qualifying organization to get the tax break. Donations to donor-advised funds and supporting organizations don’t count.

For those who want to make charitable contribution of more than $300 cash, you would need to itemize if you also want to take a deduction for your donations. Here are just a few examples of items you may deduct — beyond simply cash — when itemizing.

  • Car expenses: If you use your car in giving service to an organization, you can deduct the cost of oil, gas, parking fees and tolls.
  • Uniform costs: If your volunteer service for a qualified charitable organization requires you to wear a uniform that isn’t suitable for everyday use, you may be able to take a charitable deduction for the cost of buying and cleaning the uniform.
  • Clothing or household items: If you donate clothing or household items, you may be able to deduct their fair market value from your taxes. In order to do this, the donated items must be in good used condition or better.

Keep in mind that charitable donations or expenses incurred while serving a qualified organization aren’t deductible if you’re reimbursed for them. And remember, you can only deduct contributions that you make. So, if your employer has a contribution match program, you can’t deduct the amount that your employer contributed.

If you have more questions about what counts as a contribution, consider consulting a tax professional or checking out Publication 526, the IRS guide to charitable contributions.

2. Know what you can’t deduct

Here’s where things get a little tricky. While some of the following aren’t deductible at all, others are partially deductible.

Here’s a list of things that are not deductible.

  • Contributions to a specific individual: You can’t deduct contributions made to an individual, even contributions to an organization for the benefit of a specific person.
  • Contributions to nonqualified organizations: If the organization isn’t a qualified charity, you can’t take a deduction. Examples of nonqualified organizations include chambers of commerce, homeowners’ associations, country clubs, and political organizations or candidates.
  • The portion of a contribution for which you receive or expect to receive a financial or economic benefit is not deductible: Such as contributions for lobbying, raffles, lotteries or tuition.
  • The value of your time or services: You can’t claim a charitable deduction based on the value of your time and services. For example, you can’t claim a charitable deduction for a blood donation or lost income while you work as an unpaid volunteer.
  • Personal expenses aren’t deductible: Including adoption expenses and the cost of meals you eat while volunteering for a qualified organization unless you’re required to be away from home overnight while volunteering.
  • Contributions to a college or university for seats at a sporting event: The Tax Cuts and Jobs Act of 2017 denied the charitable deduction for any contribution made in exchange for the right to buy tickets or receive seating at a college athletic event.

Here’s a list of things that are generally not deductible but may have some exceptions.

  • Appraisal fees: On donated property, these fees aren’t eligible for a charitable deduction.
  • Contributions to donor-advised funds: Contributions to donor-advised funds sponsored by war veterans organizations, fraternal societies or nonprofit cemetery companies aren’t deductible. And you can’t deduct a contribution to a donor-advised fund if you don’t have acknowledgement from the sponsoring organization that it has exclusive legal control over contributions.
  • Partial interest in property: You generally can’t deduct partial interest in a property, but there are a few exceptions that you can find in Publication 526. But you can deduct your contribution if you donate your entire interest in a property.

Don’t forget, these lists aren’t exhaustive. Make sure to check in with a tax professional or take a look at IRS documentation before preparing your taxes if you have any questions or concerns about your personal situation.

3. Keep meticulous records

As with any other deduction or credit you claim when filing your taxes, it’s imperative that you keep records of your charitable donations in case you get audited.

Dec. 31 is the deadline for making a charitable contribution that could count toward your current year taxes. Keeping good records can help ensure you don’t forget the donation you made in the spring of the current tax year if you don’t file your taxes until April of the following year.

In some cases, the amount of your donation may require different records. For example, with cash donations less than $250, you need a bank record (canceled check, or a bank, credit union or credit card statement), receipt or payroll deduction.

But if the donation is $250 or more, the IRS requires that you have acknowledgment of the contribution from the charitable organization or certain payroll deduction records.

For non-cash contributions, things get even more complicated. “Non-cash charitable contributions value is based on the fair market value of the property when the property is given to the qualified organization,” says Simmons. Check out IRS Publication 526 to see what records you need based on the value of your donation.

4. Be mindful of the limits

Normally, you can’t deduct more than 60% of your adjusted gross income, or AGI, for charitable donations, and in some cases that limit could go down to 20% or 30% depending on how and to whom you donate. But the CARES Act raises that limit if you itemize. For the 2020 tax year, you can make cash donations up to 100% of your AGI and write off the amount as a deduction. But you must itemize to take this bigger deduction. Any charitable contributions over that amount can be carried forward for five years and deducted later.

If you donated property to a qualified organization for conservation purposes, that limit goes up to 15 years.

5. Impact of tax reform legislation

The Tax Cuts and Jobs Act of 2017 affected charitable contributions. Starting with the 2018 tax year, you are now allowed to donate up to 60% of your AGI if your contribution is made in cash to public charities and certain other organizations. Previously, that limit was 50% of AGI.

That changes for the 2020 tax year, in which you can donate up to 100% of your AGI. The IRS hasn’t provided guidance on whether this change extends to future tax years.

The 2017 tax reform also stipulated that you’re no longer off the hook to substantiate your donation if the organization you donated to filed a tax return that included your donation. Previously, if your donation appeared on the organization’s return, you didn’t need any additional written acknowledgement of the donation in order to deduct it on your tax return.

Finally, under previous tax law, overall itemized deductions were limited for people with income over certain levels. Tax reform suspended the limitation for tax years between Dec. 31, 2017, and Dec. 31, 2025.

6. Get the right forms

The $300 above-the-line tax break for the 2020 tax year can be deducted on Form 1040. If you plan to contribute more, then you’ll need to file IRS Schedule A along with your federal Form 1040. Schedule A is where you can itemize deductions such as charitable donations.

“You can deduct the cash donations or the value of the non-cash donations on your personal tax return by itemizing with the Schedule A form under the ‘gifts to charity’ section and Form 8283 Noncash Charitable Contributions,” says Noel Dalmacio, CPA and president of Dalmacio Accountancy Corp.

If you’ve donated a vehicle, you’ll also need to attach Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes. You’ll receive the form from the organization to which you donated within 30 days of the donation or the sale of the vehicle, depending on the circumstances.

Bottom line

Donating to charity can be a rewarding experience, both spiritually and by boosting your tax refund. When you’re deducting a charitable donation post tax reform, you’ll need to make sure it still qualifies.

Don’t be afraid to consult a tax expert if you have questions or want extra help.