A tax deduction lowers an individual’s or organization’s tax liability by lowering income tax. To claim tax deductions, you have to itemize your tax return by filing schedule A of the internal revenue service Form 1040. There are certain requirements that a tax-deductible donation must meet to be approved. Generally, you can deduct up to 60% of your gross income. But depending on the type of organization you are donating to, your deduction may be limited to 20% or 30%. Contributing to private organizations may come with a lower limit. These deduction limits apply to the donations made the whole year to an organization. So let’s look at some of the basic charitable contribution deduction rules to help you get some extra cash to accompany your good deed.
Make Donations to Qualifying Organizations
Your donation will qualify for tax deduction only if you donate to a tax–exempt organization as provided for under section 501(c) (3) of the internal revenue code. Some qualified tax-exempt institutions include;
- Nonprofit organizations
- Red Cross
- Public parks.
Your organization of choice may be a nonprofit institution but may not qualify as a tax-exempt organization under section 501(c) (3). Therefore you need to look out for such organizations by conducting a background check and verifying through the IRS checking tool. Also, before making your contribution inquire from the organization how much of your donation qualifies for a tax deduction.
Document your Donations
It would be best if you always did a follow-up on your donations despite the amount. After contributing, some of the qualifying documents you should have with you include bank statements, receipt from the institution (with essential details such as date, name of the institution, and the amount paid), or credit card statement. If you donate from your paycheck, you also need to keep copies of your payslips, indicating the amount and date the donation was made.
Also, the IRS will need additional documents from you if you are making donations of more than $250 (cash or property). In this case, you will be required to have an acknowledgment letter from the organization you are contributing to. The letter of acknowledgment must get to you on the date you are filing your taxes.
Ensure you get Tax Deductions from Volunteering
According to the IRS rules, you cannot get a tax deduction for the value of your time. But, you can get exempted from tax for expenses related to your volunteering actions for a qualified organization. You can only get a deduction if the expenses are directly and only associated with the volunteer work done. The tax deductibles can include fuel used during the volunteer work. Therefore you need to keep such receipts for proof of the amount used and the date.
“Thank you” Gifts Received from the Organization do not Count for a Tax Deduction
If the nonprofit organization gave out any goods and services in exchange for a donation- for example, an umbrella in exchange for a donation or a shopping voucher as a gift for winning at the organization’s silent auction. In such cases, only a portion of your donation will qualify for tax exemption. You will not be able to claim a deduction on the portion donated that paid for the fair market value of the goods and services received after giving out your donation.
For clarity, ensure the organization indicates if there were no gifts or services received in exchange for your contribution. With such disclaimers, you will quickly calculate the tax deduction that you will receive. It would be best if you also kept written acknowledgments for future references.
Itemize your deductions
When filing your tax returns, you have the option of taking the standard deduction or itemizing your deductions. The option chosen should help you get more tax benefits. Claiming a standard deduction allows you to deduct a specific amount of money from your taxes. While itemizing items lowers your income from a list of qualifying expenditures that have received IRS approval.
Most taxpayers go for the option that lowers their tax bill more, and in a case of a charitable donation itemizing your donations will do. Therefore if your annual expenses are more than the value of a standard deduction, then you are better off itemizing your deduction to maximize your tax benefits. Itemized deductions are also known as below-the-line deductions since they are removed from your gross income.
We all want to save some money, and what better way to do it than donating to charity. However, you have to follow the necessary rules that the IRS has provided to qualify for a tax deduction. If you ignore the rules, you may make substantial contributions but still not get the tax exemption.