Are Charity Donations Tax Deductible?
If you plan to make a donation to a charity this year, donations are tax deductible. It's important to know how itemized deductions work.
Sept. 9 2020, Updated 2:00 p.m. ET
Charity donations provide some peace of mind for individuals who want to use their wealth to help others. Also, charitable donations offer some of the best tax-saving opportunities available.
Donating to a charity helps the donator and the charity itself. The charity gets the money and the taxpayer receives a substantial tax deduction within a certain limit. Although the tax deduction limits change based on the fiscal climate, the benefits can't be underplayed.
How much can you claim in tax deductions?
According to the Internal Revenue Service (IRS), individuals who make charitable contributions can deduct up to 50 percent of their adjusted gross income if they have donated to qualified organizations. The tax deductions from donations don't just exist for the mega-rich either. Anyone who donates to a qualified charity can take advantage of the tax deductions.
Note that you can only claim the donations as itemized deductions on your taxes. The tax write-offs are for charitable giving but only apply when the amount exceeds the standard deduction. The deductions can be limited to 20 percent or 30 percent in some cases depending on the tax laws in place that year. Usually, the IRS caps the total value of the charitable contributions annually.
How do tax deductions for donations work?
The Charitable Contributions Deduction comes with some provisos in order to prevent false claims. In order to make these deductions, the recipient charity must be considered a “duly qualified organization” under the IRS rules. This requirement rules out any friends, relatives, business connections, or any other such group that might be affiliated with the taxpayer.
What is a qualified organization?
The IRS provides a list of eligible entities that includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes, nonprofit veterans' organizations, fraternal lodge groups, as well as cemetery and burial companies. The list also includes organizations dedicated to the prevention of cruelty to animals or children as well as the development of amateur sports. Certain legal corporations can also qualify.
What are the limits for cash donations?
The amount of charitable cash contributions taxpayers can deduct as an itemized deduction is limited to a percentage of the taxpayer's adjusted gross income. However, qualified contributions aren't subject to this limitation in 2020. In some cases, individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income.
The deduction is part of the coronavirus relief package. To qualify for these deductions, the contribution must be a cash contribution. The contribution has to be made to a qualifying organization in the calendar year 2020. Contributions of non-cash property don't qualify for the deduction. Taxpayers may be subject to normal limits come tax time.
Charitable donations aren’t always going to work in your favor as far as the IRS is concerned. If you are donating a substantial amount to qualified charities and have the information for these donations saved, consider speaking to a financial advisor during tax time.