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Rules for Charitable Giving are Always Changing

| August 18, 2021

Your financial advisor can help guide you through the maze of IRS rules

Contributing to charities comes with a load of tax rules. Here’s are a few things to think about..

Every April 16th (or July 16th in 2020 and May 17th in 2021 ) should remind us of everyone’s least favorite season – tax-planning time. Because starting well in advance of the deadline for filing taxes is simply a prudent thing to do.

Now, keep many tax tactics in mind when preparing your next year’s return, especially if you hope to lessen your taxes and itemize deductions on Schedule A. These deductions might include medical and dental expenses and unreimbursed employee business expenses –  and amounts given to charities.

Deducting charitable contributions often whittles your taxes. But rules for charitable giving are confusing and you must be careful before entering that deduction.

What kind of donation will you make this year? The maximum you can deduct depends on whether you donate cash or property and on the type of charity as defined by the Internal Revenue Service:

  • Public charities don’t pay private individuals, engage substantially in legislative activities or take part in any political activity;
  • Private operating foundations spend at least 85% of their adjusted net income or its minimum investment return on its exempt activities; and
  • Private non-operating foundations principally provide grants to other entities or to individuals for charitable or other exempt purposes.

The IRS Rules are Always Changing

In most years, any donation generally maxed out at 50% of your yearly income minus deductions, or adjusted gross income (AGI). And deductions for donations to certain groups such as veterans’ organizations, fraternal societies, nonprofit cemeteries and others often maxed out at 30% of your AGI.

But guess what? The IRS put a temporary limit on charitable contributions (and this is expected to change yet again, so be careful before you donate).

Taken directly from the IRS website:

“In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be: 

  • a cash contribution;
  • made to a qualifying organization;
  • made during the calendar year 2020

Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.”

Know Where You’re Donating

To whom do you want to donate? The IRS requires that you give to a qualified organization in the U.S. to claim a deduction. An organization’s merely claiming tax-exempt status doesn’t automatically make your donation deductible.

Many major charities fit the criteria, but double-check that your organization of choice makes the list. The IRS offers a search tool to look for qualifying organizations.

Learn what you may not know. You can never deduct some donations, for example, such as Bibles, gifts to individuals and donations to political parties or candidates. Services provided are also not deductible.

Among other fine points of deducting donations:

For deductible cash donations, the IRS requires standard documentation of a bank record, payroll deduction or written communication from the qualified organization. This communication must include the name of organization and the date and amount of contribution regardless of the amount donated.

For all donations (cash and property) more than $250, you must show the above documentation, plus a written acknowledgement of the donation’s amount and whether any portion of the donation was in exchange for goods or services.

These few reminders only skim the surface of charitable giving. Best to check with your financial advisor before you give until it hurts.