How it works
Welcome back to the itemized deductions deep dive. I know this has been a truly riveting experience for all of you, so hold onto your hats while we take a stab at explaining how charitable contributions work.
Charitable contributions are another part of your itemized deductions. That means that in order for them to matter, you have to have enough in other deductions to get yourself over the standard deduction. So remember, your mortgage interest, tax deductions (capped at $10,000), and charitable contributions have to be greater than $27,700 if you’re a married person. That number is $13,850 for single people in 2023.
In order to take a deduction for charitable contributions that you’ve made, they have to first be made to a qualifying organization. It is YOUR JOB to verify that you are donating to a qualifying organization. The donor should provide you with an acknowledgement of your donation, which should have their address/tax status somewhere on it. The donation also has to be made within the calendar year that you are taking the deduction for.
What donations are deductible?
There are many ways to make a tax-deductible donation to charity, but the few listed here are the most common.
Cash/check/credit card donations
These are exactly what they sound like. Again, the donation has to be made directly to the qualifying organization. If your donation is more than $250, the IRS says that you MUST have written acknowledgement of the donation in order to claim a deduction for it on your taxes. If the organization does not give you one automatically, you should request it from them. This document must have the amount you contributed, a statement showing whether any goods or services were provided as a result of your contribution, and a description of these goods/services if applicable.
Clothing, household, and other non-cash items
In other words, Goodwill. There are other organizations that take them, but this is the most common. When you are donating items to an organization like this, it’s first critical to keep your receipt showing the date you donated the items. On that receipt, you should put a description of each of the items that you donated and an estimated value of each item. Most organizations like Goodwill have a list showing estimated fair market values for each type of item that they accept. It’s a good practice to use this list and detail it out if you’re taking this deduction. The thing that I always stress to clients about these is that they should be reasonably valued. If you purchased a rug for $600 over ten years ago, please don’t tell me it’s now worth $500. It’s an ugly rug and you know it.
One of the most commonly misunderstood parts of non-cash donations is what to do when your non-cash donations are valued at more than $500. If the total of all of your donations are more than $500, you are required to file a form 8283 with your taxes. This form will list out the date of each donation, a value of each drop-off, and a rough description of the items donated. If any ONE donation drop-off is valued at more than $500, you also have to report your cost basis of each donation drop-off. In other words, you have to tell the IRS what you paid for all those items that you just shoved in a garbage back and hurled out your window towards Goodwill. Since this is nearly impossible, I generally recommend taking values less than $500 if it’s close. If you’re donating large items (such as cars), there are specific reporting requirements and ways that we can track this information down.
If you are donating any one item that is valued at more than $5,000, there is a separate form you have to fill out for that as well. This is a bit more complicated, and may require an appraisal of the items that you donated.
Stocks & other securities
This is a neat section of the tax code that not enough people take advantage of. Let’s say I purchase stock in Apple a number of years ago for $1,000. It has now appreciated to a value of $5,000. I was going to give $5,000 to my church this year. If I sell this stock and give them the cash, I have to pay tax on the $4,000 gain that I have in the position. If I instead give the stock directly to the organization, I can avoid paying tax on the gains that I have on the stock, but I still get to take a deduction for the full $5,000. In order to do this, you have to first make sure the organization accepts donations of securities. Assuming they do, this is a great way to give while reducing your tax liability.
If you are the type of person that is constantly donating your time and efforts to charitable causes, you may be able to take a deduction for the miles you drive specifically for charitable activities. In 2023, you can take $0.14/mile. You have to keep really good records for this though, so be sure to keep a mileage log if this is something worth taking.
What donations are not deductible?
This tends to be a short/easy list, so we’ll summarize this one with some bullet points:
Donating your time: Although your time may be valuable, the IRS does not think so. You cannot take an hourly rate or any sort of deduction for the amount of time you spend on charitable activities.
Go Fund Me donations: I get this question at least once per year. Although this is a fantastic way to raise money for a specific cause or a friend in need, it is generally not considered a charitable contribution for tax purposes.
Raffle tickets at events: Although the organization you bought it from may use the proceeds for charitable purposes, you don’t get a deduction for this because there is a chance you could have won something. I know you didn’t win, but there was at least a chance.
Value of stuff you received: The best example of this is when you’re attending a Gala or a charitable event of some kind. You generally pay a ticket price, and included in your ticket is a dinner or drinks or something similar. When determining your deduction for these items, you have to subtract the fair market value of what you received for your purchase.
Political donations: Although you gave out of the kindness of your heart, the IRS is very clear that political donations are not deductible.
Value of blood given to a blood bank: I honestly don’t know why they felt the need to make a whole section about this in the IRS publication. I have yet to have a client ask me if they can deduct the value of the blood they gave away to a blood bank. So I guess you may be better off selling your blood on the black market (or maybe they call it the blood market?). Either way, I can’t let you write it off and I’m really sorry.
Questions about what you can deduct this year? Give us a call or send us an email. You can also fax or beep us if you prefer.