How does a Charitable Donation Tax Deduction Work?

If you donate funds to a nonprofit organization during a given year, you are eligible for a charitable donation tax deduction on your tax return. In order to receive this deduction, though, you must follow the IRS procedures to file it appropriately. You will claim the deduction on your Form 1040, Schedule A. There is a specific line for you to input your deduction. If you are completing your taxes online, you will be prompted when it is time to enter your deduction.

Charitable Contribution Deduction Rules

  • You must donate cash or property. If you pledge funds, you do not receive a deduction until you have fulfilled that pledge. For example, pledging $20 a month to your public radio network does not mean you get a deduction of $480 that year. You have to provide information on what you have actually given.
  • You must be giving the funds to a tax-exempt organization. Tax deductible charity organizations must have 501(c)(3) status.
  • You must be able to itemize your deductions. If you do not plan on itemizing your deductions this year, then you cannot capitalize on the deductions you have made through charitable contributions.
  • You have to keep your records. For example, if you have received a charitable donation appraisal on property you donated, you need to have this appraisal on-hand come tax time.

Record Keeping

You must keep written records of all donations to charity, including tax donations. If you are giving a sum larger than $250 on one donation, then you will need supporting documentation in order to receive the benefits. You should even keep records of any cash donations. To ensure your records qualify, keep the following:

  • The name of the organization - if you have the organization's tax payer identification, keep this as well
  • The date of your contribution
  • The amount of your contribution

Property Contributions

If you are not donating money, you may be able to receive a charitable deduction for donation of property. You must be able to prove the market value of the property you donated if you intend on itemizing the deduction. You need the following in this case:

  • An appraisal form stating the fair market value of your item - If you are not having the item appraised, you may not need this form, but the IRS can question your determined fair market amount if it is unsubstantiated with an appraisal. If your donation is more than $5,000, you need an appraisal or it will not stand up to the scrutiny of the IRS.
  • IRS Form 8283 is required for a single non-cash contribution of over $500.
  • If you are donating a vehicle, and the vehicle is worth more than $500, you need a written statement from the organization you donated the vehicle to and an appraisal of value.

Charitable Donation Limits

There is what is called a 50/30/20 deduction limit on all charitable donations. This means the following:

  • The limit for cash contributions to charity is 50% of your adjusted gross income
  • The limit for property contributions is 30% of your adjusted gross income
  • You can deduct contributions of capital gains assets up to 20% of your adjusted gross income.
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