Donations: 5 Ways to Maximize Your Tax Deduction

Charitable donations of both money and goods to qualified organizations can be deducted on your income taxes, lowering your taxable income. The charity must be designated as a 501(c)(3) organization by the Internal Revenue Service (IRS).1 Deductions for charitable donations generally cannot exceed 60% of your adjusted gross income (AGI), though in some cases limits of 20%, 30%, or 50% may apply.2 In order to claim the deductions, you must itemize deductions on your taxes rather than claim the standard deduction.3

KEY TAKEAWAYS

• Charitable giving can help those in need or support a worthy cause; it can also lower your income tax expense.
• Eligible donations of cash, as well as items, are tax deductible, but be sure that the recipient is a 503(c)(3) charitable organization and keep donation receipts.
• The amount you can deduct in a given year is subject to limits, but you can carry forward some of those unused deductions over a period of five years, again subject to eligibility.
  

1. Plan Your Giving

There are many tax-planning opportunities with charitable donations that you can take advantage of to give you the largest deduction possible. If you know that you will be in a higher tax bracket next year than you were this year, you may want to wait and take the deduction next year, when it will be greater. Large charitable gifts should also be planned carefully in order to maximize the deduction and minimize your out-of-pocket cost.

For example, if you have $25,000 in taxable income this year and donate 60% of that, or $15,000, to charity, you will receive the deduction for the whole gift, and what you save on taxes lowers the cost of the gift to you. If you donate more than $15,000, the excess will have to be carried over to the next taxation year and you won’t have the benefit of that portion of the deduction for another 12 months.4

2. Get a Receipt for Your Donations

You need proof of charitable contributions in order to claim them with the IRS. Any cash donation of $250 or more requires a “contemporaneous written acknowledgment” (as defined by the IRS) of the gift from the organization. For smaller cash donations you only need a bank record or a simple receipt from the charity. If a donation of less than $250 is made via a payroll deduction, you need a pay stub, a W-2 form, or some other record from your employer that shows the date and amount, or a pledge card from the organization that states that it did not provide goods or services for the amount deducted.5

However, getting a receipt every time you donate strengthens your tax records if you are audited. If you make a large donation and do not have or cannot find the receipt, it will almost certainly be disallowed on audit. Set up your record-keeping system at the beginning of each year and file all donation receipts in the same place.

3. Donate Household Goods

If you want to save money on taxes, be charitable, and clean out your basement at the same time, you can donate household goods as well. There are many charities and church organizations that accept donations of clothing and household items to give away or resell to those in need.

The rules for non-cash donations are a little stricter than those for cash ones. You are allowed to donate goods at their estimated value at the time of donation, not at the value they had when first purchased. For donations worth less than $250, you must get a written receipt from the organization as well as prepare a list of items donated and their value. For donations of $250 to $500, you need a “contemporaneous written acknowledgment” from the charity. For donations above $500 but below $5,000, you must, in addition to having the acknowledgment, fill out IRS Form 8283.6 Donations of goods worth more than $5,000 require an official appraisal on top of the acknowledgment and Form 8283.7

TIP: For the 2021 tax year, the IRS allows people who take the standard deduction rather than itemize to nevertheless deduct some charitable donations. Those filing singly, as well as married couples filing separately, can take up to $300 worth of charitable donations as a tax deduction. Married couples filing jointly can take up to $600.8

4. Don’t Forget Vehicle Expenses

If you volunteer for a charitable organization and have unreimbursed car expenses, you can claim them as a charitable gift if you have maintained excellent bookkeeping records. The miles that you drive in the year for the charity should be logged in a mileage log, including the date of each trip, the purpose of the trip, and the total miles driven. You are allowed to claim either actual expenses or a mileage allowance of 14 cents per mile.9 The latter is much easier to track and report. You must also obtain written confirmation from the charity for the volunteer driving.10

5. Track Your Carryforwards Carefully

If you cannot deduct all of your charitable donations in a year because you have hit the maximum percentage of taxable income, you can carry them forward for up to five years, after which time they expire and you can no longer use them. If you have tax carry forwards, track them carefully, so that you use them up before expiration. If it appears that you are at risk of losing a balance carryforward, hold back on the current year’s donations and use up the older ones first.11

Can I Get a Tax Deduction for Donating to a Tax-Exempt Organization?

Not necessarily. In order for your donation to be tax deductible, it must go to a group that has had 501(c)(3) status conferred on it by the IRS. Not all tax-exempt organizations are granted this status.

Is There a Limit on the Amount of Donations That Can Be Deducted?

Yes. The limit is usually 60% of your adjusted gross income for the year. However, in some circumstances that limit can be reduced to 50%, 30%, or even 20%.

What Do I Do if I Have Donated More Than the Annual Limit?

The IRS allows you to carry forward deductions for up to five years after the year in which you made the donation. If you do have carryforwards, it’s important to use up the older ones first before claiming current ones, otherwise you may lose a deduction once you hit the five-year limit.

The Bottom Line

Donating to charity is a great way to show your giving spirit and save money on your taxes at the same time. It’s a win-win situation. However, you must make sure to follow the rules set down by the IRS and keep careful records to both substantiate your donations and keep track of how much you have given, so you don’t inadvertently miss taking a deduction.

Article Sources:

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1. USA.gov. "Donating to Charity."
2. Internal Revenue Service. "Publication 526, Charitable Contributions," Page 4.
3. Internal Revenue Service. "Topic No. 506 Charitable Contributions."
4. Internal Revenue Service. "Publication 526, Charitable Contributions," Pages 4, 19.
5. Internal Revenue Service. "Publication 526, Charitable Contributions," Page 20.
6. Internal Revenue Service. "About Form 8283, Noncash Charitable Contributions."
7. Internal Revenue Service. "Publication 526, Charitable Contributions," Pages 20-21.
8. Internal Revenue Service. "Expanded Tax Benefits Help Individuals and Businesses Give to Charity During 2021; Deductions Up to $600 Available for Cash Donations by Non-itemizers."
9. Internal Revenue Service. "Standard Mileage Rates."
10. Internal Revenue Service. "Providing Disaster Relief Through Charitable Organizations: Working With Volunteers."
11. Internal Revenue Service. "Publication 526, Charitable Contributions," Page 19.