“No one has ever become poor by giving.” – Anne Frank
There is something to be said about giving. It brings joy to be able to help others in need. It is an added bonus that you could potentially receive a tax deduction in the process. To take full advantage of the tax incentive it helps to know the requirements.
It’s nice to give but not every deduction is tax deductible. In order to be tax deductible the donation must be made to a 501(c)(3) organization, a tax-exempt status granted by the Internal Revenue Service (IRS). This means the money you gave to your uncle when he fell on hard times isn’t deductible. Neither is the coat you bought for the homeless woman who was out in the cold. The donations you make should be made to a 501(c)(3) organization and documented. You can always search the IRS charitable database to see if an organization has 501(c)(3) status.
The need for documentation is especially true if you make a contribution in cash. When you donate cash, of any amount, you must retain a receipt for the donation. Cash also includes payments you make by check, money order or credit card.
If you donate property valued at $250 or more you must obtain acknowledgement of the donation in writing. If the property has a claimed value of $5,000 or more you will need to gather an appraisal of the item(s). It’s important to remember though that you must keep record of the name and address of the organization you paid the date and location of the donation as well as a description of the property.
Can I Get a Deduction for Donating a Car?
You could receive a tax deduction for giving not just money and clothes but also your car. Some nonprofits even encourage it and doing so is straightforward. Instead of having the car just collecting dust in the rear of the driveway a local charity could benefit from either its use or the money that it could generate.
Once you have donated the car the charitable organization will issue Form 1098-C to you. If the car is sold, the charitable organization should provide Form 1098-C within 30 days of the sale. This is the same document that is issued whether you donate a car a boat or airplane and it must be attached to your tax return. The charitable deduction is limited to, not the amount you believe the car is worth but, what the organization can sell it for. The valuation is important because there have been many instances where the IRS has not only disallowed deductions but also assessed penalties when taxpayers have inflated the value of their donations.
How Much Can I Deduct?
The coronavirus has made 2020 an unpredictable year to say the least. However, the government has put legislation in place to ease the economic pain. One such way is through the CARES Act which increased the deductibility of charitable contributions for individuals from 60% of adjusted gross income to 100%. The limit for qualified contributions was 10% and that has now been increased to 25%.
Deductions of charitable contributions are typically taken when you itemize on your tax return. The CARES Act allows $300 deduction even if you don’t itemize and take the standard deduction instead.
Many taxpayers have overvalued their donations, failed to get receipts from the organization or omitted required information on forms only learn later on that their deduction has been denied. Don’t make that mistake! It is better to give than to receive but do so while still getting the full tax deduction you’re entitled to.