- What qualifies as a charitable donation for the IRS?
- What do I need to do to document these donations?
- Is it worth the bother?
These are the universal questions about charitable donations and federal tax, and the answers are relatively straightforward. Time to clear up any lingering questions about charitable donations that you might have.
1. What qualifies as a charitable donation for the IRS?
Contributions of money or goods to any tax-exempt organization are considered charitable donations by the IRS.
Let’s break down that definition into more practical terms, and then we’ll move to some examples.
“Contributions of money or goods…are considered charitable donations.”
What is “money or goods”?
Donating money is easy to understand, but donating goods may raise your curiosity. “Goods” is defined as “merchandise or possessions.” In other words, “goods” refers to things.
The things you donate don’t need to be new. Donating second-hand items to a thrift store, baked goods to a food kitchen, or an old car to an organization that helps refugees—these are all common and legal ways to make a charitable donation. Art, jewelry, stocks, real estate, and patents are other types of items which are donated to charity.
“Contributions of money or goods to any tax-exempt organization are considered charitable donations… ”
What are tax-exempt organizations, and how can they be identified?
Most tax-exempt organizations advertise their status as such because they know it will make it more likely that tax-payers will support them.
The IRS has identified 11 categories of tax-exempt organizations, which may give you the idea that there are a lot more tax-exempt organizations than most people realize.
Easily identified types of tax-exempt organizations include:
- religious organizations
- schools and universities
- charity groups such as the Red Cross
- veterans’ organizations
- non-profit thrift stores
- scientific research groups such as the American Heart Association
You can check the tax-exempt status of an organization or company by calling the IRS directly at 1-877-829-5500. You will be asked to provide a name, address, and employer identification number for the organization.
Tax-exempt status is a controversial topic which often appears in the news. Should private schools or nontraditional schools be tax exempt? What about Hasidic schools in Brooklyn that only teach Talmud? Should acupuncture clinics receive tax-exemptions similar to the non-profit city hospital? What about shaman-run medical clinics? Should a religious organization receive tax-exemption if it discriminates against the LGBTQ+ community or refuses to ordain women?
What about service fraternities that also publish white supremacy literature? Should universities be allowed to pocket the money from highly-profitable college sports without paying federal taxes? Should the profits from college sports really be exempt from taxes? Tax exemption is intended to be available to groups espousing a wide range of views, but people disagree about where the appropriate limits should be set. Again, to stay out of the gray area, make sure to contact the IRS for clarification before you assume a group is tax exempt.
2. What do I need to do to document charitable donations?
You don’t have to attach documents proving your charitable donations to your tax returns, but it is important to keep these documents in case you are audited. You will need some kind of written acknowledgement for donations of goods or money. Save bank records or written records for cash donations, and Form 8283 for non-cash deductions.
You need to keep track of your charitable donations, no matter the amount. For a monetary donation, documentation might include a bank statement, a credit card statement, a receipt from the charity (including date, amount, and name of the organization), or a cancelled check. If your contribution was an automatic deduction from your paycheck through your employer, keep copies of your W-2 forms or your pay stubs to show the dates and amounts of your charitable donations.
3. Is it worth the bother?
Donations to charitable organizations are tax deductible, not tax refundable. You will not receive tax relief, dollar-per-dollar for the amount that you donated.
Itemizing your charitable donations will take either your time or the time of your tax relief services provider. It may create a higher bill from your CPA, or require you to purchase higher-cost tax software, if you are preparing your taxes on your own. The standard deduction, which applies to every taxpayer who chooses not to itemize their charitable deductions, may be higher than your charitable donations. If you have not contributed quite significantly to charitable organizations, or if you have not kept the proper documentation, then it is not “worth it” to try to lower your taxes by itemizing your charitable donations.
Tax relief experts recommend that you eyeball the amount of your charitable donations to estimate whether it will be worth itemizing your donations on your tax return. In 2020, the standard deduction for a single taxpayer or married taxpayers filing separately is $12,400. The standard deduction for heads of households is $18,650.
Will your charitable donations surpass this standard deduction? If so, it will be worth the effort to itemize your charitable donations and claim the full tax deduction. Offering a tax deduction for charitable donations is the government’s way to support individual giving in behalf of worthy, community-based causes. Generously giving your money and goods to organizations that you support can be very rewarding, both emotionally and financially.