Charitable giving during the holiday season this year takes on a new, happier meaning when it comes to tax deductions.
Typically, most people aren't able to get a tax break when they donate money to a charity if they're claiming the standard deduction on their federal income tax returns. And nearly 9 out of 10 taxpayers are taking that standard deduction these days.
Yet pandemic relief in Congress created a special but temporary break for giving money to a qualified charity that applies to people who do not itemize.
A married couple taking the standard deduction is allowed to claim up to $600 for cash contributions made to qualifying charities in 2021, if filing a joint return. It's a temporary break, which is set to expire on Jan. 1.
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A single individual, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions.
If some of this sounds familiar, it is, somewhat.
On 2020 federal income tax returns, cash donations of up to $300 made to qualifying organizations were treated as deductible for those who didn't itemize.
"The difference this year: Those who file married filing jointly are allowed a direct deduction of up to a combined total of $600," said Mark Steber, chief tax information officer at Jackson Hewitt, the national tax preparation chain.
Why giving in December makes sense
Such news can give you an extra incentive to stop shopping for some not-so-perfect gifts and instead opt to donate money to a charity that has a special meaning for a special someone on your gift list.
That tax break might even make you more willing to tell some close friends that instead of gifts this year, you'd like them to give money directly to your favorite charity or cause.
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Tax savings can be $30 to $222
How much you'd save, of course, will depend on how much money you give, your taxable income and your tax bracket.
"With tax rates ranging from 10% to 37%, a $600 deduction would be worth $60 in reduced taxes to someone in the 10% tax bracket and $222 to someone in the 37% bracket," said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
"Similarly, a deduction of $300 would be worth $30 to someone in the 10% tax bracket and $111 to someone in the 37% tax bracket," he said.
Understand the rules
Remember, there are limits and restrictions for this deduction for those who don't itemize.
You can deduct cash contributions made by check, credit card or debit card. But the IRS notes that "cash contributions don’t include the value of volunteer services, securities, household items or other property."
So cleaning out the house and donating furniture isn't going to cut it for this unique tax break.
"It must be a cash donation — not goods or your time — and given to an organization approved by the IRS, not just a friend who is doing good work in the community," Steber said.
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Get paperwork to back up the deduction
And you want proof.
A canceled check is sufficient to support a charitable donation, Luscombe said. If you hand over actual cash, you need a written letter from the charity to confirm the contribution.
If you give $250 or more at once to a group, you need written communication to state whether the donor received something of value in return.
What if you give more money?
If you're itemizing, you can take a bigger deduction for charitable contributions, including donations of clothing, cars, securities and bigger ticket items.
It's also good to know that pandemic-related relief in Washington temporarily eliminated some restrictions placed on how much money in cash contributions you can deduct, if you itemize, according to Lisa Greene-Lewis, a TurboTax CPA and tax expert.
Usually, cash donations that you can deduct are limited to 60% of your adjusted gross income but that limit was temporarily eliminated for tax year 2021 returns, just like it was for 2020.
As a result, "taxpayers can claim a charitable deduction up to 100% of their adjusted gross income or AGI in 2021," said Susan Allen, senior manager for Tax Practice & Ethics with the American Institute of CPAs.
Just because you can donate a lot of cash, though, doesn't mean that's the best strategy when it comes to tax planning.
Some are better off donating stock that's been held more than a year and has built up a good deal of value directly to a charity to avoid capital gains taxes.
Best to talk to your tax professional. (You can claim a charitable deduction for non-cash assets held more than one year that's up to 30% of AGI. But the IRS permits a carryover for five tax years, if your charitable deduction exceeds AGI limits in a given tax year.)
"Donating appreciated stock can be particularly advantageous since you can get a deduction for the fair market value of the donated stock without having to realize the gain on the stock as a taxable capital gain," Luscombe said.
Will you itemize or not?
Now is a great time to consider what donations you'd like to make. But again, you need to take into account whether you're going to itemize or not.
"If you donate non-cash items, you need to be eligible to claim itemized deductions," Greene-Lewis said.
Your itemized deductions, she noted, for expenses for things like home mortgage interest, property taxes and charitable contributions need to add up to more than your standard deduction, which is $12,550 single or married filing separately; and $25,100 for married filing jointly in 2021.
For heads of households, the standard deduction is $18,800.
Many people do not itemize deductions, especially after the tax rule changes went into place in 2018 and nearly doubled the standard deduction.
Higher inflation also will drive up the standard deduction by a several hundred dollars for the 2022 tax returns, which will be filed in 2023.
The standard deduction for married couples filing jointly goes up by $800 for 2022.
For single taxpayers and married individuals filing separately, the standard deduction increases by $400 for 2022.
For heads of households, the standard deduction goes up another $600 for 2022.
Is it a qualified charity?
If you're making a last-minute donation, you want to be certain that the charity you’re considering is a qualified charity so that you can receive a tax break.
"Taxpayers often try to claim deductions for contributions to organizations that are not qualified charities, such as political candidates or lobbying organizations," Luscombe said.
Giving to someone's personal GoFundMe effort isn't usually going to cut it.
Yet donations made to GoFundMe certified charity fundraisers are tax-deductible and will receive tax receipts automatically from the charity partner, PayPal Giving Fund, according to a spokesperson for GoFundMe.
The giving platform has specific GoFundMe Cause programs, including Justice & Equality, Pride, Mental Health and Basic Necessities.
Keep your paperwork to back up your deduction and do your homework upfront.
“Every year there are court cases where the IRS has denied an individual’s charitable contributions due to lack of required documentation, improper valuation or lack of an appraisal, if needed," Allen said.
Be cautious about just handing over money to any request during this giving season.
"There are, unfortunately, a lot of scammers who are looking for 'donations' this time of year," Steber warned.
The IRS offers an online search tool for finding out about an organization's tax-exempt status at IRS.gov.
Paying attention now — and making any last-minute cash donations by Dec. 31 — can make a good deal of sense because many people who don't itemize are looking at a tax benefit with a limited shelf life.
ContactSusan Tompor via [email protected]. Follow her on Twitter@tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.
