Many of the tax breaks provided by the federal government are designed to incentivize taxpayers into taking some action that benefits society. Retirement savings credits and deductions urge people to save for their golden years so they’re not a burden on society when the time comes that they can no longer work. The charitable contribution deduction encourages taxpayers to share what they have with those who are less fortunate.
This isn’t to say that the Internal Revenue Service will toss you a tax reward for helping out a neighbor in need, however. Charitable contributions are only deductible when they’re made to qualifying organizations – in other words, one that has been given the IRS stamp of approval. You can’t deduct contributions made to individuals, or to civic leagues, chambers of commerce, labor unions, or political or social organizations.
A Long List of Qualifying Charities
A qualifying charity is an organization that meets the rules contained in Section 170(c) of the Internal Revenue Code, and this covers a lot of ground. The recipient of your generosity can be a United States state, a veteran’s organization, a religious institution, a nonprofit fire department, an organization that’s formed solely for religious, literary, scientific or educational purposes, or one that prevents cruelty to animals or children. And this list isn’t all-inclusive.
You might think you’re faced with a boggling challenge when you’re trying to figure out whether the organization you’re thinking of contributing to is covered. But the IRS provides a searchable tool online, the Tax Exempt Organization Search, to help you along. Simply enter the name and some details about the charity, and the tool should give you a red or green light as to whether it’s a qualifying organization.
The charity must also be a U.S. entity. The IRS warns that you can find some with foreign addresses listed in the Organization Search, but don’t be deterred. They’re still considered to be domestic organizations, and they’re acceptable. Those addresses just mean that they offer services in foreign countries.
You Can’t Always Deduct All Your Gifts
You generally can’t deduct 100% of your gifts, at least in most tax years. You’re limited to a deduction of no more than 60 percent of your adjusted gross income or AGI under normal circumstances, and some charitable contributions are limited to just 20 or 30 percent.
Unfortunately, your AGI can be less than your overall income because it’s arrived at after you subtract any adjustment-to-income deductions that you might qualify for. On the bright side, this limit used to be just 50 percent before the passage of the Tax Cuts and Jobs Act.
Other limiting rules apply as well. That raffle ticket you bought to support a charity is fully deductible up to the AGI guidelines – unless you win the prize. You’d have to deduct the fair market value of whatever you received in this case. The same goes if you’re given any sort of tax credit or deduction in exchange for your donation. You must basically deduct the value of anything you receive from the value of the gift you've given.
Some Special Rules in 2020 and 2021
The federal government made an adjustment to the percentage-of-AGI rule in tax year 2021 in response to the coronavirus pandemic. You can claim a deduction for up to 100 percent of your adjusted gross income for any contributions you make in calendar year 2021, as long as your gift is cash, not tangible property.
And here’s another special rule: Section 2204 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act lets you claim a $300 deduction for your charitable giving without itemizing or doing a lot of calculations, but again, it has to be cash. Married taxpayers who file joint returns can each claim this deduction, or $600 on their return – one $300 deduction per spouse.
This is one of those above-the-line deductions that’s subtracted from your overall income right off the bat when you begin preparing your tax return. It helps determine your AGI. This option is available for tax years 2020 and 2021, the tax return you'll file in 2022. You can claim it and claim the standard deduction or itemize other deductions as well.
It’s unclear whether these special coronavirus provisions will continue into the 2022 tax year, but you can claim them on the 2021 return you’ll file in 2022.
Fair Market Value of Tangible Property
The value of your donation is simple enough to determine if you give cash – $300 is $300, plain and simple. But a lot of additional rules apply when you give tangible property.
Your deduction is limited to the gift’s “fair market value” in this case. The IRS defines this as what the item would reasonably be expected to sell for on the open market if the transaction was made between a willing buyer and a willing seller, both of whom are aware of all the facts of the situation.
The IRS suggests that you can arrive at a close-to-accurate fair market value by considering:
- How much it would cost to replace the item in its current condition
- How much similar items of property are currently selling for
- How much you’d expect to receive for the item if you were to sell it rather than give it away
You’ll most likely want to have gifts like artwork, jewelry or collectibles appraised by an expert, although you can’t deduct any fees you pay a professional to determine your gift’s fair market value.
Clothing or household items you donate must be in “good used condition or better,” according to the IRS, so you can probably forget about taking a tax deduction for that sofa your cat has been sharpening its claws on for years. Food isn’t considered a household item, nor are objects of art, other such collections or jewelry, although this doesn’t mean they’re not deductible. They’re just subject to different rules.
Read More: Importance of Donating Clothes
The Value of Your Time
Unfortunately, the IRS doesn’t agree that time is money, at least not when it comes to tax deductions. The value of the hours you devote to charitable activities isn’t deductible, even if you had to miss work and you lost pay in order to perform them. But there’s a catch here. You might be able to claim a deduction for any money you had to spend in order to provide services to a qualified organization, subject to more rules.
You can’t be reimbursed by the charity for the expense, and whatever you spent money on must have a clear and identifiable connection to the services you provided. It can’t be personal in any way. In other words, you would not have had to spend this money if you hadn’t been providing charitable services, and this rule is particularly stringent. The cost of that burger you grabbed while you were away from home all day, helping others, is only deductible if it was necessary for you to stay away from home overnight.
It’s an Itemized Deduction
So you’ve met all the rules and you’ve determined that you do indeed have a qualifying charitable deduction. Unfortunately, it doesn’t get any easier from here, at least not unless you claim that $300 above-the-line adjustment to income provided for under the terms of the CARES Act.
Otherwise, you’ll have to itemize your deductions to claim one for charitable giving, and this might not be worth your while, even with the 100 percent rule in place. You can itemize or you can claim the standard deduction, but you can’t do both in the same tax year. And the standard deductions for 2021 are pretty hefty, thanks to inflation adjustments and the Tax Cuts and Jobs Act that went into effect in 2018:
- $12,550 if you’re single or married but filing a separate tax return
- $18,800 if you qualify as head of household, or
- $24,100 if you’re married and filing a joint tax return
The total of all your itemized deductions, including your charitable contributions, would have to exceed these amounts or you’d be paying taxes on more income than you have to if you itemize. And itemizing your deductions involves completing an additional tax form as well: Schedule A.
You must actually make the donation during the tax year in question to be able to claim it, and it’s not just a matter of telling the IRS, “I gave $100 to the XYZ Foundation.” The IRS indicates that you should have either written confirmation of the gift from the charity, or a bank or credit card statement that clearly shows the amount and who received the gift.
Gifts worth $250 or more must be acknowledged by the charity in writing – a bank statement alone won’t suffice. The written statement must clearly indicate whether you received anything in return.
Documentation requirements ratchet up from here depending on the value of your gift. You must complete and submit Form 8283, “Noncash Charitable Contributions,” with your tax return if you’ve given tangible property worth more than $500. But this requirement actually provides a loophole in that “good used condition or better” requirement for household goods and clothing. You can deduct the value of less-than-good-quality items if they’re worth more than $500 and you have an appraisal that confirms the value.
You wouldn’t have to complete Section B of Form 8283 unless your gift is worth more than $5,000, but you’d also have to submit an appraisal in this case to prove its value.
An exception to the $5,000-or-more rule exists for donated boats, airplanes, or cars. You wouldn’t need an appraisal in this case, provided that the organization sold the vehicle because it preferred to have the cash rather than the transportation. Your deduction would be equal to the sales price in this case.
- IRS: Charitable Contribution Deductions
- IRS: Topic No. 506: Charitable Contributions
- IRS: Publication 526, Charitable Contributions
- IRS: Publication 561, Determining the Value of Donated Property
- Journal of Accountancy: The New Charitable Deduction for Non-Itemizers
- IRS: Form 1040 Individual Income Tax Return 2020
- Tax Policy Center: What Is the Tax Treatment of Charitable Contributions?
- IRS: Tax Exempt Organization Search (Formerly Select Check)
- IRS: Form 8283 Noncash Charitable Contributions
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2021
- IRS: Schedule A Itemized Deductions
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.