Must-Know Info on How Charitable Deductions Work
You need to itemize in order to claim your charitable deduction
The latest tax act raised the standard deduction single filers to $12,200 and joint filers to $24,400. It appears the big increase in standard deduction has had a negative impact on the percentage of taxpayers who make charitable contributions because you are unable to deduct the contributions if you decide to go with the standard deduction rather than opting for itemization. Determining whether to itemize or not depends on your specific situation so you will need to consult an experienced and knowledgeable tax advisor. As a general rule, the interest on your mortgage is a factor in determining whether you should itemize as this is a write-off that you can take advantage of only if you itemize. The new tax law also limited the interest deduction to loans up to $750,000 for homes purchased after December 15, 2017. If you purchased your home prior to that date, then you can deduct the interest on a home loan of up to $1 million for primary residences. In addition, you can continue to enjoy the mortgage interest deduction until the year 2025, according to Lending Tree. Also, your taxes paid to the state are limited to a $10,000 deduction. If your mortgage interest deduction plus your state tax deduction is close to the standard deduction amount then your charitable contribution will provide you with the tax benefits outlined below.
Donating to Just Any Charity is Not Enough to Claim the Tax Deduction
It is extremely important to understand that, in order to qualify for the charitable donation tax deduction, your donation needs to be made to a “qualified” charitable organization. If you donate to an individual or institution that is not qualified under the tax code, then your generosity doesn’t count and you won’t be able to get the deduction.
Qualified Charitable Organizations
To qualify for the deduction, your donation must be made to a tax-exempt 501(c)(3) organization or fall under Section 170(c) of the Internal Revenue Code (“IRC”). For example, you can generally get a tax deduction for contributions made to:
· Churches and other religious organizations that fall under Section 170(c) of the IRC
· American Red Cross
· Salvation Army
· Boy Scouts and Girl Scouts of America
· Boys Clubs and Girls Clubs of America
· Tax-exempt educational organizations
· Tax-exempt hospitals
· Nonprofit volunteer fire companies
· Specific veterans’ groups and fraternal societies
· You can only claim for charities registered in the U.S. This means there is no tax deduction for foreign entities.
Many charitable organizations qualify for tax-deductible donations, but not all, so you need to be proactive and make sure your chosen charity is considered “qualified” under the tax code. If you are curious, the Internal Revenue Service maintains an online database of all qualified and acceptable charitable organizations.
Organizations Generally Not Qualified for the Charitable Giving Tax Deduction
Generally, the charitable tax deductions are not allowed for contributions made to:
· Chambers of commerce, or
· Labor unions.
Limitations on the Amount You Can Give
In addition to limiting who and what you can donate to, the IRC places a limit on how much of your generosity you can claim via the itemized tax deduction. As of 2019, an individual is limited to 60 percent of their adjusted gross income (AGI) on most donations made to public charities and certain private foundations. However, if you donate “appreciated tangible assets” that you owned for one year or longer, then you can only claim a 30 percent deduction of the asset’s current fair market value. This rule applies to donations made to veterans’ organizations, fraternal societies, and some private foundation. Furthermore, if you make a donation of capital gain property, then you will be limited to a 20 percent deduction.
When You Can Claim the Tax Deduction
Your donation to a qualified charity is deductible the same year in which it is made. So, if you make a donation in November 2019, you can claim the deduction on your 2019 taxes. This means the donation is considered paid when you place the check in the mail, or when the donation is charged to your credit card, as opposed to when you pay the credit card.
This means you should make sure that your charitable donation is made prior to December 31 of the year in which you plan to claim the charitable deduction.
Documentation Needed to Claim the Charitable Deduction
If you drop a few hundred dollars into a charity’s collection box or bucket without getting a receipt or any other documentation, then you should not claim that donation for tax purposes. Why? Because there is no actual proof that you made the donation and the IRS probably will not take your word for it.
In order to properly claim this deduction, you need to secure written confirmation from the charity. The confirmation needs to include the name of the charitable organization, the date you made the contribution, and the amount or value of the donation. Charities are only required to provide written acknowledgment for donations over $250, but most do offer a receipt, no matter what size of contribution you make. If you attempt to claim more than a $500 non-cash donation, be prepared to file IRS Form 8283 with your tax return.
Speak to an Attorney
If you have questions about whether it makes sense to move forward with a charitable donation and the impact a donation could have on your estate, consider speaking to an experienced trust and estate attorney in your area.