There is no greater joy than serving the community, and donation to a charitable organization is the best way to do that. Charitable donations help the needy, provide you with the joy of giving, and can also help you with tax advantages.
Donations are one of the great ways for taxpayers to claim tax deductions. You can claim a deduction for both monetary and non-monetary transactions. However, there are a few factors that you must keep in mind when claiming a charitable donation tax deduction. Let us discuss them in detail.
- Itemization
The maximum deduction that a taxpayer can claim as an itemized deduction is limited to sixty percent of the Adjusted Gross Income. For qualified donations, the deduction can be 100 percent. The limitation can vary depending on the type of contribution and the organization.
The limitation applies to all the donations you make throughout the year, irrespective of the number of receiving organizations. If your yearly contribution exceeds the limit, you can claim the excess amount in the form of carryover for the next five years.
You can also claim the deduction without itemizing the taxable amount.
For the year 2021, you can deduct donations up to $300 if you are single or married, filing separately. A married couple, filing their tax return jointly, can claim a deduction of up to $600.
To itemize your charitable donation tax deduction, you need to file Schedule A with the rest of your tax return. You can also weigh the benefits and decide not to itemize the donation. If the standard deduction is more than the total of your itemized deduction, you can choose not to itemize the contribution.
- Qualifying organization
To claim a charitable donation tax deduction, you need to ensure that the receiving organization is tax-exempt as defined by Internal Revenue Code, section 501(c)(3). The eligible organizations include those operating exclusively for religious, scientific, charitable, literary, or educational purposes, supporting amateur sports, or prevention of animal or child cruelty.
An organization can be non-profit even without being eligible as per tax code and Internal Revenue Services. Also, it is essential to ensure that the donation is made for the eligible purpose of a non-profit organization.
You can use the IRS Exempt Organizations Select Check tool to verify the tax-exempt status of your organization. Also, enquire the charitable organization of your choice about the amount of tax deduction.
- Documentation
For charitable donation tax deduction, you need to maintain adequate documentation. Even when your donation amounts are small, you should maintain adequate records.
For monetary donations, depending on the mode of payment, the bank statement, credit card statement, a canceled check can serve as proof of payment.
If you have donated as an automatic periodic deduction from your paycheck, you need to maintain copies of your W-2 or pay stubs.
A receipt from the receiving organization also serves as useful documentation in claiming a deduction.
If you make a non-monetary donation, you can still claim the deduction. In such a case, you need to maintain a list of all the items donated. The fair market value of such items is the donation amount and can be claimed in your tax returns.
- Additional documentation requirement
• For monetary or non-monetary donations worth more than $250
You need to get an acknowledgment letter from the charitable organization before the date you file your tax returns. The letter should mention the donation amount, any items received in exchange, and an estimate of the value of such goods.
• For non-monetary donations exceeding $500
If the amount of non-cash donation exceeds $500, you need to fill out form 8283.
• For non-monetary donations exceeding $5000
In case of non-cash donations of more than $5000, you need to fill form 8283 and attach an appraisal of your items along with the form.
These are some of the basics of tax deductions for charitable donations that you must know. Considering the above-mentioned factors will help you get the maximum tax saving on your charitable contribution.
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