Times of crisis like the present brings out the best and worst of humanity. Some people go out of their way to help others in need. Congress has acted to encourage charitable giving by expanding the tax deduction for charitable contributions.
Tax deduction for charitable giving: The basics
The tax law has long said that you can take a tax deduction if you give money or property to a public charity. But there’s a catch: You can only claim a charitable deduction if you itemize your personal deductions on IRS Schedule A.
Schedule A is the tax form you use to claim your deductible personal expenses. These include charitable contributions, home mortgage interest, state and local taxes, and a few others.
Unfortunately, few taxpayers have enough personal deductions to itemize. You should itemize only if all your personal deductions exceed the standard deduction.
The Tax Cuts and Jobs Act that went into effect in 2018 roughly doubled the standard deduction. For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for marrieds filing jointly.
Ninety percent of all taxpayers don’t have enough personal deductions to itemize with the standard deduction at current levels. The result is that ten percent of all taxpayers can deduct their charitable contributions.
New $300 universal charitable deduction
To help the devasted American economy, Congress passed the Coronavirus Aid Relief and Economic Security Act (CARES Act). Among its many provisions is allowing all taxpayers to deduct at least some charitable contributions: a universal charitable deduction.
Taxpayers who don’t itemize may now deduct up to $300 per year in charitable contributions. However, their deductions must:
- Be in cash (no property like old clothes), and
- Made to a 501(c)(3) public charity
You don’t have to file Schedule A to claim this deduction. It’s an “above the line” deduction you claim as an adjustment to income on your return.
You also don’t have to file any documentation with your tax return for the deduction. But you should have a written record of all your cash contributions and keep it in your tax files. For cash donations under $250, you can use a bank statement or other documentation that substantiates that you made the payment. For all cash donations above $250, you have a document or receipt from the charity.
This change in the tax law is permanent, starting in 2020.
2020 increase in charitable donation limit
What if you want to give a substantial amount of money or property to charity? Can you deduct the whole amount if you itemize? No, you can’t. There is an annual limit on the charitable deduction.
In normal years, the limit is sixty percent of your adjusted gross income. That is, you may deduct an amount equal to no more than sixty percent of your AGI for the year.
The CARES Act increases this annual limit. For 2020 only, you can deduct charitable contributions up to one hundred percent of your adjusted gross income. Corporate taxpayers may deduct up 25 percent of adjusted taxable income, increased from 10 percent (15 percent for food donations).
These recent changes make 2020 the best year ever for wealthier taxpayers to make prodigious charitable contributions.
Only contributions to public charities are deductible
It’s important to understand that you may only deduct contributions you make to a public charity organized under Section 501(c)(3) of the tax code. These are often referred to as Section 501(c)(3) organizations.
To become a Section 501(c)(3) organization, a charity must apply the IRS. However, churches are exempt from this requirement.
Volunteering for charity
Not everybody can give money or property to charity. Some people volunteer their time and labor.
Unfortunately, you can’t take a tax deduction for the value of your labor that you give to charity. For example, a doctor or nurse who volunteers at a local hospital can’t deduct the value of his or her work.
However, volunteers for public charities can deduct their expenses if they itemize their deductions. To be deductible, volunteer expenses must be:
- Unreimbursed by the charity
- Directly connected with the volunteer services
- Incurred only because of the volunteer services, and
- Not personal, living, or family expenses.
Example: Georgia Jamison sent $500 on car expenses and parking while volunteering for Frontline Charities. Frontline does not reimburse his out-of-pocket expenses. However, he may deduct $500 as a charitable contribution if he itemizes his deductions on Schedule A.
You can’t deduct aid to individuals
You can never deduct donations or other help you give to an individual, even if the person is sick, needy, or otherwise in need of help. For example, you can’t deduct the cost of buying groceries for an elderly neighbor stuck inside due to the coronavirus.
Because good deeds aren’t deductible, it doesn’t mean you shouldn’t help out individuals. It just means you can’t deduct the cost. If you want a deduction, donate to a registered public charity that helps individuals in need.