The IRS & Charitable Tax Deductions

For more than 100 years, the tax code has allowed individuals to claim tax deductions for contributions made to qualified charitable organizations. Although, over time, what has been considered a contribution, who you can make it to and the limits of deductibility have changed. While the official 2020 forms and instructions have not yet been issued by the IRS as of October 2020, here is what we know based on IRS Publication 526.

The Big Picture

In order to deduct a charitable contribution from your taxes, you have to itemize various expenses including medical, state and local taxes, home mortgage interest, charitable donations and others on your Schedule A form. The total expenses identified on your Schedule A need to be greater than the standard deduction or else there is no value in itemizing these expenses.

With the passage of the sweeping Tax Cuts and Jobs Act of 2017, the value for most taxpayers to file a Schedule A has been dramatically reduced because the standard deduction nearly doubled and a ​$10,000​ limit has been placed on what taxpayers can deduct for state and local taxes. For 2019, it’s been estimated that itemizing expenses, including charitable donations, and filing a Schedule A was only beneficial for about 13.7 percent ​of taxpayers.

If you itemize and your total Schedule A exceeds the standard deduction, what’s the value of a $100 charitable donation? It depends on your tax bracket, but either $12, $22, $24 or $32.

There are deduction limits. These are a set percentage of your adjusted gross income and vary depending on the type of donation.

Help from the CARES Act of 2020

Happily, there are two favorable temporary changes for charitable tax deductions for your 2020 tax return:

  1. Even if you don’t itemize, you can deduct ​up to $300​ in cash charitable donations.
  2. There is no longer a ​60 percent​ of adjusted gross income (AGI) limit on cash donations.

Qualified Charitable Organizations

Qualified charitable organizations have to apply to the IRS to receive tax-exempt status, and, if approved, they become known as 501(c)(3) organizations. You’ll recognize them as promoting social causes, civic improvement, veterans groups and religious organizations. Donations to political candidates, unions, homeowners' associations and others, are not qualified. The organization will usually state explicitly if it is a 501(c)(3) organization, but when in doubt, use the Tax Exempt Organization Search tool to verify their status.

Types of Donations

Donations can either be in the form of cash or property. While simple in concept, there are a few important callouts worth noting:

  1. If you receive a benefit from the contribution, you can only deduct the amount of the contribution that exceeds the value of the benefit. So if you contribute $250 to your community symphony and, in return, receive some free tickets worth $100, then you can only deduct the difference, or $150.
  2. Generally, you can’t deduct the value of any voluntary services you have provided, even if you have particular qualifications. For instance, medical professionals can’t deduct for any time spent volunteering after a natural disaster.

Donation of Property

The value of your donated property is based on fair market value. Whether the item is a used sweater, a refrigerator, a car or your coin collection, you’ll need to find some means to validate the value you claim. Determining the fair market value is subjective and often difficult and, while there are qualified appraisers for almost everything, they are impractical for most common donations.

To overcome this, the IRS offers guidelines summarized below and detailed in Publication 561.

  1. Household items​ – they must be considered to be in good condition and should be valued at the cost of similar items for sale in a second-hand store.
  2. Cars​ – the IRS allows the lesser value of either a) the gross proceeds of the sale of the car by the organization you donated it to or b) the fair market value of the vehicle at the time you donated it, as supported by recognized car selling guides and when using the value of a private sale (not a car dealer’s retail selling price).

Documentation for Charitable Donations

You should always document your contributions. Cash contributions are usually easily documented with credit card or bank statements and receipts provided by the organization you donated to. If you make a donation of property, you may need to have supporting evidence, such as pictures, original receipts and selling prices from relevant second-hand stores selling comparable items.

For an item or group of similar items, the IRS requires the following specific documentation depending on the amount of the donation:

  • If greater than $250​ – an acknowledgment from the receiving entity with a description and whether you received any benefit
  • If greater than $500​ – you also need to complete Form 8283
  • If greater than $5,000​ – you must also prove its value with a qualified appraisal

Whether you’re donating cash or property, it’s a lot easier to prepare and save the documentation of the fair market value at the time you make the contribution rather than later when you file your return or, worse, a year or more later when your return is audited.

Deductibility Limits for 2020

There are deduction limits. These are a set percentage of your adjusted gross income and vary depending on the type of donation. Until 2020, the overall limit was up to 60 percent of your AGI, but with the passage of the CARES Act, taxpayers can now deduct ​up to 100 percent​ of your AGI for cash donations.