Donation Limits When Filing Federal Taxes

The Coronavirus Aid, Relief and Economic Stimulus Act of 2020 (CARES), along with many important financial benefits to help most of us through the COVID-19 pandemic, offers a boon to taxpayers and non-profits alike. Some of these include changes to charity donation limits for those who itemize as well as a limited deduction for people who don't itemize. Although the 2020 forms and publications haven’t been universally updated and made available, here’s what we know as of November 2020.

The first key change was to significantly increase the limit on cash contributions to qualified organizations. Instead of the normal limits of ​60 percent​ of adjusted gross income (AGI), for qualifying donations made in 2020, a temporary increase has been implemented raising the limit to ​100 percent​ of the taxpayer’s AGI. Lower limits for donations of non-cash real property continue without change.

In addition, while taxpayers normally must itemize their qualifying expenses and file a Schedule A to take advantage of the charitable donations deduction, thanks to CARES, for 2020, even if you don’t itemize, you can deduct ​up to $300​ for cash contributions to qualified organizations. This is known as an “above the line” deduction and reduces AGI dollar for dollar up to the $300 limit.

This is a big win, because with the passage of the Tax Cuts and Jobs Act of 2017, the standard deduction was nearly doubled. Now only about ​13.7 percent​ of taxpayers have sufficient expenses to qualify for Schedule A itemization and claiming a deduction for charitable donations. But in 2020, everyone can realize the benefit of lower taxes from their generosity.

Whether a taxpayer itemizes or not, to qualify for a charitable contribution tax deduction, the contribution must be cash and must be made to a qualified or tax-exempt organization. Generally qualified organizations include recognizable charities such as the Salvation Army or Goodwill, churches, veterans groups, public schools and other community groups like The United Way, SPCA or a volunteer fire department. Donations to political candidates, unions, homeowners' associations, foreign-based organizations and others are not qualified.

If you’re in doubt about whether your planned donation could be questioned by the IRS in an audit, the IRS has a public link to their database of all qualified organizations.

Qualifying organizations are divided in various ways for tax purposes. One of these is public charities and private foundations. Private foundations are further grouped into sub-groups that have to do with how soon and which types of charities their contributions are disbursed to.

Aside from the temporary suspension for 2020 of the cash contribution deduction limit, all other limits for donations of non-cash real property remain and fall into groups of either ​50 percent, 30 percent or 20 percent​ of AGI depending on what is donated and to whom the donation is made. The specifics are outlined in IRS Publication 526.

For 2020, the 50 percent of AGI donation limit continues to apply to non-cash real property donations made to public charities and certain private foundations. The 30 percent limit applies to non-cash contributions to certain other private foundations, or when the donation is of property that is subject to capital gain. The 20 percent limit applies to non-cash donations of capital gain properties to certain private foundations when the donation is made “for the use of” instead of “to.”

Donations made to qualifying organizations, even if they exceed the limit allowed by the IRS in a given year, can be carried over for use in future years' tax filings. Excess donations can be carried over for ​up to five years​. So if the 2020 taxpayer takes advantage of the 100 percent AGI limit for cash donations and also donates non-cash real property, the value of donations in excess of the 100 percent cap can be used as deductions in subsequent years as late as the 2025 tax year.

The IRS offers guidelines in Publication 561 for determining the fair market value of donations of non-cash real property. All non-cash donations, regardless of the donee organization, must use fair and reasonable methods for determining the value of the donation. This is especially true for used furniture, clothing and other household furnishings. Generally, if the value is significant, the taxpayer should consider using a professional third-party appraiser to justify the value.

One of the most basic errors taxpayers make is in assuming that, for instance, their $150 donation to the local symphony is 100 percent tax-deductible. If there is some kind of benefit derived from the donation, say free seats or refreshments, then the value of the benefit must be estimated and deducted from the donation and the difference between the two used as the amount claimed when filing the tax return.

Whether a donation is for cash or for non-cash real property, it should be documented with appropriate receipts and relevant independent justification of the value of the donation.