Here are some tax implications of donations to keep in mind as you finalize your year-end charitable giving:
- You must itemize deductions on Schedule A to deduct a charitable contribution. 2021 presents an exception to this rule. Individuals will be able to claim a $300 ($600 for married individuals filing joint returns in 2021) above-the-line deduction for cash contributions made, generally, to public charities in 2021. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
- Donate before year-end to claim a deduction. Please remember if you are making a stock donation to submit the request a few weeks before the end of the year as this will allow your custodian enough time to fulfill the request in time for the deadline.
- Verify that the charity is tax-exempt (sometimes called 501(c)(3) organizations) or qualified. Most organizations, other than churches and governments, must apply to the IRS to become a qualified organization. More information about qualified organizations can be found in IRS Publication 526, Charitable Contributions. You can also verify the tax-exempt status of an organization on the IRS.gov website.
- When making your donation of cash or goods be sure to get a receipt. The IRS requires a receipt for donations greater than $250. If under $250 you need to have supporting documentation such as a bank record or receipt documenting the contribution.
- For donated property with a value of more than $5,000, you’re generally required to obtain a qualified appraisal and to attach an appraisal summary to the tax return. However, a qualified appraisal isn’t required for publicly traded securities for which market quotations are readily available. For non-publicly traded securities, a written appraisal is required only when the deduction claimed exceeds $10,000.
- For gifts of art valued at $20,000 or more, you must attach a complete copy of the signed appraisal (rather than an appraisal summary) to your return.
- If you are giving a large donation and the contribution is to a “50% limit organization” (generally speaking most are), the deduction, if cash, is limited to 60% of your adjusted gross income (AGI). Non-cash contributions to a “50% limit organization” are, generally speaking, limited to 50% of AGI reduced by cash 60% contributions. When planning a large gift, talk to your tax professional to develop the most beneficial giving strategy. The 2020 CARES Act presents an exception to the AGI limits for cash contributions. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
- Lastly, many employers will match gifts made by their employees so remember to check your company policy and do twice as much good!
- If you are required to take distributions from your IRA, consider qualified charitable distributions (QCD), which serves to reduce your income. A QCD can often have benefits over and above the charitable deduction of the same amount. If you are unfamiliar with a QCD, read our article “What Are RMDs and QCDs?“
In addition to understanding the tax implications of donations, make sure to read our related blog post Tax Implications of Charitable Giving and download our whitepaper Charitable Gifting Strategies to Maximize Income Tax Benefits.
Larry Harris, CPA, CFP®, PFS
