Gifts to charitable and non-profit organizations help in so many ways. They benefit the charity itself, often by providing funds that are used in research, operations, and more. They are also one of the best ways to minimize your tax obligations. Charitable gifts are deducted in part or in whole on yearly tax return filing. This ultimately reduces your taxable income.
There are new provisions in place for the 2020 tax season that will apply to your returns filed in 2021. You need to know about them in order to take advantage of them properly when you file.
Charitable Contribution Basics
Charitable gifts are treated differently for tax purposes for a number of reasons. It can vary depending on the type of assets that were donated. For example, cash, clothing, household items, or even vehicles and boats. The rules also vary based on who the contribution is made by. Whether that is an individual, a business, or a corporate entity.
The amount of the deduction is particularly important, and usually subject to limits and ceilings. The changes to the 2020 charitable gifts deduction put in place special rules for the 2020 tax year only, which increase the deductions significantly. These changes, therefore, increase the amounts of tax benefits for donations made specifically in cash.
Some Donations Do Not Qualify
While the limits of contributions went up, you will want to ensure that your donations to charity were made to allowable organizations. The law states that the deductions are only to be used to contributions that serve a charitable purpose. This means that the recipient must have already qualified for and been granted tax-exempt status by the IRS.
These organizations most commonly include religious entities, charities operated for scientific, educational, or literary goals, and organizations that strive to prevent cruelty to animals or children. Other eligible parties may include nonprofit veteran organizations, amateur sports development entities, fraternal groups or lodge orders, and burial or cremation companies.
What Is The Maximum Deduction Amount You Can Claim For Your Donation
For the 2020 tax year, taxpayers who choose to claim the standard deduction can claim up to $300 in charitable gifts made in cash, used in the determination of the taxpayer’s adjusted gross income, or AGI. It is worth noting specifically, that noncash property like securities are not eligible. Neither are donations to dormant or non-operating organizations, or contributions to veterans fraternal societies, or carryforwards from previous tax years. This “above the line” deduction will generally benefit taxpayers that do not itemize.
The donation ceiling was raised for 2020 from the previous limit of 60% of any individual’s contribution base (commonly their AGI). This limit was raised to allow the contributions of non-cash donations up to the entire amount of their AGI. In some situations, individual taxpayers may be able to completely eliminate their taxable income. In many cases, this means the tax obligation would also drop to zero, meaning a refund of all taxes.