One of the most popular deductions available on a 1040 tax form is charitable giving. This allows taxpayers to provide support for the vital services provided by charitable organizations while reaping tax benefits.
What Are Tax Deductions?
Tax deductions are a common way for taxpayers to reduce their taxable income and tax liability.
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Tax deductions can account for expenses incurred during the tax year that range from medical expenses to property taxes or mortgage interest and charitable donations. Deductions reduce taxable income in order to reduce overall tax liability. They are not the same as tax credits.
Most taxpayers take the standard deduction on their tax returns, but many others elect to itemize if their deductions are higher than the standard deduction. Charitable giving is a popular deduction for taxpayers who typically itemize. It is important to follow IRS guidelines regarding allowable deductions.
Tax deductions, such as the standard deduction, reduce the amount of taxable income for taxpayers. The CARES Act has made some temporary changes to the limits specific to charitable donations that were instituted for 2020 and extended for the 2021 tax season.
How Much Can I Donate?
The IRS has allowed taxpayers to donate all the way up to 100 percent of their adjusted gross income for 2020 and 2021. Normally, the limits are 60 percent of AGI for cash contributions and 50 percent for noncash. The limit is 30 percent for donor-advised funds.
If a taxpayer takes the standard deduction, individual filers may deduct up to $300 and married filers can deduct $600 for cash donations during the 2020 and 2021 tax seasons.
The IRS made the deduction for charitable cash donations available to non-itemizers in order to encourage charitable giving during the pandemic. Taxpayers can donate to any registered 501(c)3 tax-exempt charitable organization to benefit from tax-deductible giving.
Eligible non-profit organizations can range from religious institutions to schools or advocacy groups. Giving to individuals or non-exempt entities should not be deducted on a tax return, as the IRS clearly distinguishes between deductible charitable donations and gifts.
Read More: The IRS & Charitable Tax Deductions
How Do I Deduct Donations?
Itemized deductions for charitable giving must be placed on the Schedule A to be filed with the 1040 tax form. Charitable giving will then be broadly categorized based on whether it included cash contributions or noncash contributions (goods or limited deductions for volunteering). Lines 11 through 14 on Schedule A are where charitable donations will be itemized.
If noncash donation amounts are higher than $500, then Form 8283 will be included with the tax return. Values for non-cash donated goods should be determined using fair market value for items. For example, a vehicle's fair market value can be determined by using a guide such as the Kelley Blue Book. There are a few ways to determine the value of non-cash donations.
If a non-cash donation is over $5,000 it will go on Section B of Form 8283. This might include donated vehicles or even fine art. Non-cash donations over $5,000 will also require an attached appraisal.
Cash donations will go on line 11 of the Schedule A. The IRS requires that individuals keep all records of donated cash gifts to charity. Itemized deductions will go on line 12A of the 1040 itself and charitable contributions will specifically go on line 12B for taxpayers who take the standard deduction.
Individual states have different requirements for charitable giving on state returns. Check with the state or local tax board for guidance on deducting donations for state filings.