By Bob Palechek, CPA | August 7, 2020
This article is to provide you a summary of how charitable deductions work, what is allowed and not allowed, limitations, and new items (see end of article).
Charitable donations are deducted on Sch A as itemized deductions. With the increase in standard deduction amounts (now $24,800 for married filing jointly) along with a $10,000 limit on State and Local Taxes (SALT), breaking the threshold for claiming itemized deductions versus the standard deduction is harder than ever. This means while your charitable intent is a good thing, it may not necessarily bring tax savings. At least through 2025, after that we go back to the old rules.
It can therefore make tax planning sense to lump or bunch together charitable donations in every other year. Trying to max out a year to receive a tax benefit. Charity paid with a credit card counts in the year of the credit card charge and not when you pay the credit card. Donor-advised funding can help with breaking the threshold in the year of the donation then spread the gift in smaller amounts to specific charities over several years.
Allowable donations include; money or property donated to churches, synagogues, temples, mosques, other religious organizations, non-profit schools and hospitals, public parks, and public charities. If you are unsure, please visit WWW.IRS.GOV. The IRS maintains a database of qualifying charities.
Non-Allowable donations include; money or property donated to civic leagues, sports clubs, chambers of commerce, most foreign organizations, individuals and politicians. If you are unsure, please ask your tax person. An addition to this category began in 2018, if you make a payment to a college for the right to purchase sporting event tickets, that payment is no longer deductible!
Substantiation of donations that do not exceed $250 in any one day to anyone organization can be supported by bank records. Cash donations require written acknowledgment from the Charity as well as all donations that exceed the $250 rule.
Non-cash donations, the most popular being made to resellers of thrift goods. Think clothing, books, household items, electronics, etc. Best practice is to keep detailed records of precisely what you donated, exact quantities, and fair market value of each item. Larger claimed deductions should have the best records. The IRS has taken several taxpayers to court previously and were successful in their efforts. The Courts believed the donations occurred but denied the deduction because there were no detailed records to back-up the donation deduction.
If you make a donation but receive something in value in return, the fair market value of what you receive needs to be deducted from the donation amount. For example, if you bid on a gift basket at a charitable auction, only the amount you actually pay above the value of the gift basket is deductible.
There are limitations in how much you can deduct each year. Cash donations are limited at 60% of adjusted gross income currently through 2025, then back to 50%. Capital gains property, for example, stock in a public company is limited to 30% of adjusted gross income. This can be a nice tax planning tool if you have some highly appreciated stock, as you get the fair market value as a possible deduction on Sch A and can avoid paying capital gains tax on the appreciation. If you choose to only deduct the cost of the stock, you can obtain a 50% limitation, but this would be kind of unusual. The good news, anything not allowed by virtue of a limitation can carry forward for up to five years. The same percentage limits carry forward as well.
New for this year only (CARES Act): The limitation for cash donations is now 100% of AGI, not 60%. You can shelter all of your taxable income this year with a charitable donation. The same five-year carryover rule applies. Also, under CARES Act, anyone can claim a $300 charitable deduction without having to itemize.