Charitable Contribution Deduction – What is It?

The holiday season is fast approaching and many will soon be thinking about charitable contributions. We’re highlighting charitable contribution deductions and what you should know. Read on for important information.

Charitable contributions might be deductible on your taxes, reducing your taxable income, but not for everyone. With the higher standard deduction from the Tax Cuts and Jobs Act, many people don’t need to itemize their deductions, meaning charitable contributions wouldn’t matter. 

If you can itemize your deductions on Schedule A because your deductions exceed the standard deduction, charitable contributions may further reduce your tax liability.

What are Charitable Contributions According to the IRS?

You must donate money or goods to a qualified organization to qualify as a charitable contribution. Most people can deduct up to 50% of their adjusted gross income, but some taxpayers are limited to 20 or 30 percent of their income, depending on the type of donation. 

If you’re retired and receiving Roth distributions or receive corpus distributions from a trust or liquidate investments with basis, you may not have a very high taxable income, which limits how much you can deduct for charitable organizations.

Proving your Charitable Deductions

If you itemize your deductions, you must have adequate proof of your charitable donation. If you write a check, you may use a copy of the canceled check along with a letter from the organization stating receipt of the funds.

If you donate cash, the organization can write a letter stating the amount you donated and that you didn’t receive any goods or services in exchange for the payment. 

If you donated non-cash items, you must receive a letter from the organization stating the items you donated, but it’s up to you to assign a fair market value to them. If you donate new items, you can usually value them at the price you paid. If you donate used items, such as clothing or furniture, the market value is the price you’d expect to get at a garage sale. 

Your tax preparer nor the charitable organization can assign a value to the item. However, if you donate to organizations like the Salvation Army or Goodwill, you can use their valuation tools. 

Ensuring you Get the Taxable Deductions you Deserve

If you itemize your deductions and keep careful track of your charitable donations, you may be able to use them to reduce your taxable income.

To ensure you can use them, ensure the following:

• You donate to a qualified organization. However, never assume the organization qualifies. Always use the IRS to ensure it’s a legitimate organization. You can also ask the organization how much of your donation will be tax deductible.
• Get adequate proof of your donation. Get a receipt from the organization if you donated over $250 in cash or non-cash items. You must also include a professional appraisal if you donate items worth over $5,000.

Final Thoughts

Charitable donations can reduce your taxable income in certain situations. It doesn’t always work in the taxpayer’s favor, though. So before you make donations, if you’re doing so for the tax deduction, consult with Murtha and Murtha CPAs to see if it will make a difference in your tax liability.