As a way of encouraging people to make charitable donations, the IRS allows you to take a deduction on your tax return based on your contribution to charities. However, the limits and rules involved can be confusing.
In order to deduct a charitable contribution, you must itemize your taxes. Less than 40% of American taxpayers do and choose the standard deductions instead. If you take the standard deduction, you can’t deduct charitable contributions.
As to the limits for individuals, you will be able to deduct at a minimum 20% of your adjusted gross income (AGI) and up to 50% of your AGI at a maximum. Nevertheless, if in a particular year you end up contributing more than 50% of your AGI, you should not feel like that will not count in your tax deduction since IRS provides an option. For such a case, IRS allows you to carry over your excess contribution to the following tax years up to the fifth year. According to the new Tax Cuts and Jobs Act recently signed off on by President Trump, the new maximum charitable contribution deduction for 2018 will be 60% of the AGI.
Now that there is a tax deduction opportunity, how can you maximize on it?
Make sure you donate to qualified organizations
The IRS has provided a complete list of the organizations that qualify for the charitable donations. You also need to verify if the organization you are contributing to qualifies for the 50% contribution limit or if it is a 30% limit type of an organization.
Keep proper records of your contributions
To claim a deduction, you must provide the IRS with supporting documents. Have a good record of such documents as canceled checks, receipts, and letters from the recipients. For cash and property worth $250 or less, a receipt indicating the amount or the item donated will be enough. For money or property worth more than $250, you will need written documents from the receiving organization. However, property donations worth more than $500 require documentation of how you obtained the property and those above $5,000 need a professional appraisal.
Account even for the small donations
Many are the times when you press the “donate $1” button at the store’s cashier, and you forget about it. If you account for that $1 donation and the $15 you gave the local leading cheering squad, it will surprise you what this can add up to in a fiscal year.
Do not inflate numbers
To avoid triggering a tax audit on yourself, always ensure that you provide the right figures for deduction on non-cash goods donated. The IRS has an average amount that a person within your household income range can give per year. If you exceed these figures, you may trigger a tax audit. However, do not let the fear of a tax audit hinder you from asking for a legitimate refund; all you need is proper documentation to back up your claim.
To ensure that you do not inflate your deductions, know the fair market value of the goods or property you are donating, which is not equivalent to the retail price of the good. Fortunately, most charitable organizations provide valuation guidelines for frequently donated goods.
Keep track of your cost of doing good
Ensure you account for the miscellaneous amounts you spend while doing charitable work. This includes keeping track of the total miles you drive for charity and the cost involved in delivering the donation.