A charitable donation is a donation made to a charitable organization in terms of money, property, or any asset for the latter’s achievement of its objectives. The most important qualification is that it should not give any significant value back to the donor. Such contributions also benefit the causes and communities while providing tax savings for itemizers.
Taxpayers will have to itemize deductions on IRS Form 1040, Schedule A, to claim a deduction for a charitable donation. Cash donations to public charities or operating foundations will enable tax deduction claims for up to 60% of a taxpayer’s adjusted gross income (AGI) during the 2023-2024 tax years.
This means that to get a tax deduction, the donation must go to a legally recognized and tax-exempt organization by the IRS. These qualified, recognized organizations include charities that operate for religious, educational, scientific, or literary purposes. Other donations, such as those to veterans’ nonprofit veterans cemetery companies or organizations for animal welfare purposes, may also qualify as tax deductions. To confirm eligibility for deductibility of contributions, taxpayers could use the IRS Tax-Exempt Organization Search Tool.
Whenever a donor gets an item or service “quid pro quo” in return for his gift, this is called a “quid pro quo” contribution. The deduction entails only the contribution amount that exceeds the fair market value (FMV) of the benefit received when this occurs. So if someone gave $40 to a charity but received a T-shirt worth only $20 in return, only $20 would be deductible from their taxes.
Deducting Noncash donations and recordkeeping
In addition to monetary donations, taxpayers can also claim allowable deductions for donated goods such as clothes, furniture, and household items to approved organizations like Goodwill or the Salvation Army. These items should be in good, usable condition. The deduction amount will be limited to its fair market value at the time of the contribution.
Special rules apply to vehicle donations, in which cases, if the FMV of the vehicle exceeds $500, taxpayers can deduct as follows: the lesser of:
- The gross proceeds from the charity’s sale of the vehicle, or
- The vehicle’s FMV on the donation date.
When the charity sells an automobile for $500 or less, taxpayers may deduct the lesser of $500 or the vehicle’s FMV. Taxpayers must then file Form 8283 if the aggregate noncash contributions exceed $500. Deduction limits exist for noncash contributions based on AGI. Contributions to qualifying organizations, such as public charities and operating foundations, are limited to 50% of AGI, while those of appreciated capital gain property are limited to 30%. Finally, any contributions made to non-qualified organizations would be subject to a further restriction of 20% against AGI.
Proper recordkeeping is crucial for taxpayers claiming charitable deductions. The documentation required depends on the type and amount of the donation:
- Cash Contributions: Donors must retain bank records, receipts, or payroll deduction records showing the donation amount, date, and recipient organization. Contributions over $250 require a written acknowledgment from the charity.
- Noncash Contributions:
- Less than $250: A receipt with details about the donated property and organization.
- Between $250 and $500: A written acknowledgment that includes a description of the property and confirmation of any goods or services provided in return.
- Over $500 to $5,000: Form 8283 must be attached to the tax return.
- Over $5,000: Taxpayers need a written appraisal from a qualified appraiser in addition to Form 8283.
Out-of-pocket expenses for services rendered to charities, such as travel or supplies, are also deductible if properly documented.
Standard vs. itemized deductions
When filing taxes, taxpayers must decide whether to itemize their deductions or claim the standard deduction. For the 2023 tax year, the standard deduction amounts are:
- $13,850 for single filers,
- $27,700 for married couples filing jointly, and
- $20,800 for heads of households.
For 2024, these amounts will be $14,600, $29,200, and $21,900, respectively. Taxpayers should use the standard deduction whenever it exceeds itemized deductions, including charitable donations. To summarize, qualified contributions can bring certain tax advantages when adequately documented and recorded.
Taxpayers must ensure that they are making their contributions to qualified organizations and keeping accurate records to maximize what will be deducted from tax returns. For more detailed guidance, IRS resources, such as Form 8283 and Publication 561, are beneficial tools for determining the value of charitable contributions.
