If you’re thinking of making a donation this year, you aren’t alone. In 2022, 64% of charitable giving came from individuals for a total of $319 billion. You may even be donating already but haven’t yet claimed your donations on your taxes.
To encourage giving, the IRS offers tax deductions for any donations made to charities over the course of the tax year. Individuals and businesses alike can declare their donations on their federal tax returns. Donations may include money, items, or even your time.
To claim these deductions, you must have the right paperwork on hand to back up your claim. Here’s what to know if you choose to give back and take advantage of the IRS incentives for doing so.
[Read more: How to Choose the Right Charity for Your Business]
Which organizations can you give back to?
Ideally, you should give back to an organization that needs your support. Experts advise not to make your decision to donate to a cause based on your ability to get a tax deduction. Support an organization with a mission you believe in, or one that you believe your customers support.
If you are seeking a tax deduction, start with the IRS’s definition of a charitable donation — it’s a little complicated. The way the IRS treats a charitable contribution varies according to:
- The recipient organizations. You can donate to registered tax-exempt organizations, which can include volunteer fire companies, religious organizations, and museums. Not every nonprofit qualifies as a tax-exempt organization, so do your research prior to making your donation.
- What you donated (e.g., cash, time, in-kind contributions, etc.). Each type of donation has specific regulations on if, and to what extent, it can be deducted on your taxes. For example, any clothes you donate must be in good condition and you can only deduct the value that the organization can earn from selling those items. You do not get to deduct the price you originally paid.
- Whether the donor was an individual, business, or corporate donor. Just as different filers have different tax regulations, they will also have varied restrictions on their donations.
- How much was donated (in dollars). If you donate over a certain amount of money, you will need to complete extra steps and forms in order to successfully deduct your donation. In some instances, you may even need a written letter from the charity confirming your donation.
There are different standards and ceilings for each of these variables, so let’s take a deeper look at each factor.
[Read more: Should Your Business Donate To Charity? Here's What You Need to Know]
What are the factors for deducting charitable contributions?
To claim a charitable contribution deduction, the recipient organization must be registered as a tax-exempt organization as defined by Section 501(c)(3) of the Internal Revenue Code. You can search for an organization's eligibility to receive tax-deductible charitable contributions using the IRS’s Tax Exempt Organization Search Tool. Note that the limit you are able to deduct applies to all donations you make throughout the year, no matter how many organizations you donate to.
What you donate is the next consideration. Cash donations are deductible, which we’ll cover in a later section. You can also donate time (by volunteering) or property; while you won’t be able to deduct the value of your service or time, you can deduct expenses related to volunteering.
Next, as a company, it’s worth noting that you can’t deduct charitable donations as business expenses. The way your business is structured also impacts the way you take deductions. For instance, if a partnership makes a charitable contribution, each partner takes a percentage share of the deduction on their tax return. If you’re unsure about the share of the deduction to take, consult with a CPA.
With those caveats out of the way, here’s how much you can deduct in charitable contributions.
Percentage limits are in place for all of the donations you make within the tax year. Regardless of how many organizations you donate to, the limitations will still apply.
How much can you deduct in charitable donations?
Any organization you donate to must be 501(c)(3) tax-exempt, but not every organization will have the same donation percentage that you can deduct on your taxes. If you donate with your taxes in mind, verify the status of the organization through a third party and ask the organization directly what percentage of the donation will be deductible. And don’t forget to ask for a receipt!
Generally, you can deduct up to 60% of your adjusted gross income in charitable donations. However, depending on the type of organization and type of contribution, you may be limited to 20%, 30%, or 50%.
When donating to churches, hospitals, and government organizations, you can deduct donations up to 50% of your adjusted gross income. Other organizations will typically allow you to deduct donations up to 40% of your income. You cannot deduct donations to unqualified organizations, such as those that actively influence politics or voting.
If you donate above those percentages, you may be able to apply that deduction to the following tax year. Carryover donations cannot be applied beyond the next five tax years, which is important to keep in mind if you decide to make any large donations.
Percentage limits are in place for all of the donations you make within the tax year. Regardless of how many organizations you donate to, the limitations will still apply.
The limit to how much you could claim temporarily changed in 2021 due to the CARES Act, passed in response to the pandemic. The CARES Act eliminated the 60% limit for cash donations to public changes. In addition, single taxpayers could deduct up to $300 of charitable contributions made in cash; married couples filing joint returns could claim up to $600 for cash contributions. However, this benefit has since expired and does not apply to taxes filed in 2023.
[Read more: 10 Tax Deductions Your Business Should Know About]
How do you claim these deductions?
It’s imperative that you document all charitable contributions. Sole proprietors, partners in a partnership, or shareholders in an S corporation report charitable contributions made by their business on Schedule A (Form 1040). Keep detailed records of your deductions and include the type of donation and the amount that you contributed.
For monetary donations, save your bank statement, credit card statement, and a receipt from the charity that shows the date, amount, and name of the organization. For cash or property donations over $250, the IRS will ask to see a written letter of acknowledgment from the charity. This letter will need to include the amount of cash donated, whether you received anything in exchange for your donation, and the estimated value of goods or services (if applicable).
Finally, if you intend to deduct at least $500 worth of noncash donations, you will need to fill out Form 8283. If the items you donated are worth more than $5,000 in total, include an appraisal of your items. Many 501(c)(3) organizations are well-versed in these record-keeping procedures, but make sure you consult a CPA if you have any questions.
What are the restrictions?
Unfortunately, you won’t be able to claim every single charitable donation — or even every type of charitable donation. In addition to the percentage restrictions, you will find other limitations to charitable deductions.
When claiming a charitable donation on your taxes, you will need to have documentation, which is often provided by the organization. You can also use a record of your payment, like your bank statement.
Any gifts to family or friends cannot be claimed as a deduction on your taxes — regardless of documentation.
When donating a vehicle to a certified organization, the amount you can deduct from your taxes depends on what the charity does with that vehicle. For example, if the charity sells the vehicle, you will be able to deduct the sale price. If the charity decides to use the vehicle, you can deduct the market value of the vehicle. If the value is over $500, you will need to complete Form 8283.
If you donate funds to charity but receive a prize in return, you may only deduct the amount of your donation from the value of the things you received. If the amount of the donation does not exceed the value of the items you received, you cannot deduct any amount of the donation.
These general rules can be a helpful guide for claiming your charitable donations, but a CPA or trusted accountant can advise you on the specifics of your own situation and needs.
This article was originally written by Emily Heaslip.
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