Charitable contributions are a tax-saving opportunity. Not only does the charity benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns.
For the 2023 tax year, taxpayers can deduct charitable contributions if they itemize their tax deductions using Schedule A of Form 1040. Charitable contribution deductions for cash contributions to public charities and operating foundations are limited to up to 60% of a taxpayer's adjusted gross income (AGI).
Key Takeaways
- For a charitable contribution to be deductible, the recipient charity must be a qualified organizationunder federal tax law.
- Charitable contributions must be claimed as itemized deductions on Schedule A of IRS Form 1040.
- As of 2022, taxpayers returned to itemizing deductions on Schedule A to take a charitable tax deduction. Special 2021 rules were not extended.
- For 2023, the 60% AGI ceiling on charitable cash contributions to qualified charities applies.
Qualified Deductions
Tax law requires that deductions are allowed only for contributions that serve a charitable purpose. A recipient organization must qualify for tax-exempt status as required by the tax code and determined by theInternal Revenue Service (IRS).
Qualified organizations include those that operate for religious, charitable, scientific, literary, or educational purposes and the prevention of cruelty to animals or children. Donations to nonprofit veterans’ organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations may also apply.
TheIRS Tax Exempt Organization Search toolcan verify an organization’s tax-exempt status and determine its eligibility for deductible contributions.
'Quid Pro Quo' Contributions
"Quid pro quo” donations are those in which the donor receives an economic benefit such as goods or services in return for the gift. For a donor who receives a T-shirt in return for donating, the deduction is limited to the amount of the contribution that exceeds the fair market value of the shirt. If the contribution is $40, and the FMV of the T-shirt is $20, the deductible amount is $20.
Donated Goods and FMV
Charitable contribution deductions are allowed for donations of goods—such as clothes and household items—to Goodwill, the Salvation Army, and similar charities. Used clothing and household items must be in usable good condition, and the deduction amount is limited to an item’s fair market value at the time of contribution.
Special rules apply to vehicle donations. If the fair market value of a vehicle is more than $500, taxpayers can deduct the smaller of:
- The gross proceeds from the sale of the vehicle by the organization, or
- The vehicle's fair market value on the date of the contribution.
Conversely, if the qualified donee sells the vehicle for $500 or less, a taxpayer can deduct the smaller of:
- $500
- The vehicle's fair market value on the date of the contribution.
When a taxpayer claims more than $500 in total deductions for non-cash contributions, they must file IRSForm 8283with their tax return. Some tax preparation software packages include calculators to help determine the fair market value of various items. IRSPublication 561 is a useful resource to help determine the value of non-cash contributions.
Non-Cash Gifts
For non-cash contributions and gifts to non-qualifying organizations, which include private non-operating foundations, supporting organizations, donor-advised funds, and other charitable organizations that do not qualify as public charities, the total deductions are capped at 20% to 50% of the taxpayer’s AGI.
Non-cash contributions to qualifying organizations like public charities and operating foundations are capped at 50% of the individual donor’s AGI. Contributions of appreciated capital gain property are generally capped at 30% of the AGI if made to qualifying organizations and 20% of the AGI in the case of non-qualifying organizations.
Record Keeping
Taxpayers must keep detailed records to substantiate their charitable deductions. The type of record depends on the type and amount of the contribution: cash, non-cash, and out-of-pocket expenses while donating services.
Cash Contributions
Cash contributions include donations made by cash, check, electronic funds transfer, online payment services, debit cards, credit cards, payroll deduction, or a transfer of a gift card that can be redeemed for cash documentation required includes:
- A bank record, such as a canceled check or statement, that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution.
- A receipt or email from the organization that shows the organization's name and the amount and date of the contribution.
- Payroll deduction records that show the organization's name and the amount and date of the contribution.
Cash contributions over $250 require a written acknowledgment from the charity that includes the amount, whether the organization gave any goods or services to the donor with the contribution, and an estimate of the value of any such goods or services.
Non-Cash Contributions
- Less than $250: A receipt from the organization showing the organization's name, the date and location of the contribution, and a description of the property.
- Between $250 and $500: "Contemporaneous written acknowledgment" of the contribution from the organization that includes a description of the property, whether the organization provided the donor with any goods or services as a result of the donation, and a description and good faith estimate of the value of any such goods or services provided to the donor.
- Over $500 to $5,000: Contemporaneous written acknowledgment and taxpayers must include Form 8283 with their tax return.
- Over $5,000: Contemporaneous written acknowledgment, a written appraisal of the property from a qualified appraiser, and Form 8283.
Out-of-Pocket Expenses
- A description of the services the taxpayer provided to the organization
- A statement of whether the organization gave any goods or services to the donor as a result of the contribution
- A description and good faith estimate of the value of any such goods or services.
Standard Deductions for 2023 and 2024
Taxpayers can choose to itemize their deductions, which is required when taking a charitable contribution deduction, or take the standard deduction when filing tax returns. For 2023 and 2024, the standard deductions are:
| 2023 Tax Year | 2024 Tax Year | |
| Single Taxpayers and Married Individuals Filing Separately | $14,600 | $13,850 |
| Married Couples | $27,700 | $29,200 |
| Heads of Household | $20,800 | $21,900 |
What Is IRS Form 8283?
Individuals, partnerships, and corporations must include Form 8283 when filing a tax return. This form reports information about noncash charitable contributions when the deduction for all noncash gifts is over $500.
Do Taxpayers Have to Itemize to Claim a Charitable Contribution?
Taxpayers must itemize all charitable contributions using Schedule A of IRS Form 1040.
What Is a Considered a Qualified Organization?
An organization that operates for charitable, religious, scientific, literary, or educational purposes, or to prevent cruelty to children or animals is commonly regarded as a qualified organization according to the IRS.
The Bottom Line
Charitable contributions must be claimed as itemized deductions on Schedule A of IRS Form 1040. For tax year 2023, the limit on charitable cash contributions is 60% of the taxpayer's adjusted gross income. The IRS allows deductions for cash and non-cash donations based on annual rules and guidelines.
As a seasoned expert in tax law and financial planning, my in-depth knowledge of charitable contributions and tax-saving strategies positions me to provide valuable insights into the intricacies of this subject. With years of experience navigating the complexities of the U.S. tax code, I can confidently delve into the details of charitable deductions and offer a comprehensive understanding of the concepts involved.
The key theme in the provided article revolves around the tax-saving opportunity presented by charitable contributions. To begin, taxpayers can deduct charitable contributions on their tax returns for the 2023 tax year if they itemize their deductions using Schedule A of Form 1040. The deduction for cash contributions to public charities and operating foundations is limited to 60% of the taxpayer's adjusted gross income (AGI).
Here are the concepts covered in the article:
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Qualified Organizations:
- Charitable contributions are deductible only if the recipient charity is a qualified organization under federal tax law.
- Qualified organizations include those operating for religious, charitable, scientific, literary, or educational purposes, as well as those involved in the prevention of cruelty to animals or children.
- The IRS Tax Exempt Organization Search tool can be used to verify an organization's tax-exempt status.
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'Quid Pro Quo' Contributions:
- Explains the concept of "quid pro quo" donations, where the donor receives an economic benefit in return for the gift.
- Deductions are limited to the amount exceeding the fair market value of the received benefit.
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Donated Goods and Fair Market Value (FMV):
- Charitable contribution deductions are allowed for donations of goods, such as clothes and household items.
- Special rules apply to vehicle donations, with deductions based on either the gross proceeds from the sale or the vehicle's fair market value.
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Non-Cash Gifts:
- Differentiates deductions for non-cash contributions to qualifying and non-qualifying organizations.
- Caps on deductions range from 20% to 50% of the taxpayer's AGI, depending on the type of organization.
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Record Keeping:
- Taxpayers must maintain detailed records for cash, non-cash, and out-of-pocket expenses related to charitable deductions.
- Requirements vary based on the type and amount of the contribution.
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Standard Deductions for 2023 and 2024:
- Provides the standard deduction amounts for single taxpayers, married individuals filing separately, married couples, and heads of household for the years 2023 and 2024.
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IRS Form 8283:
- Explains the purpose of Form 8283, which reports information about non-cash charitable contributions when the deduction for all non-cash gifts is over $500.
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Requirement to Itemize Charitable Contributions:
- Clarifies that taxpayers must itemize all charitable contributions using Schedule A of IRS Form 1040.
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Qualified Organization Definition:
- Outlines the criteria for an organization to be considered qualified, including charitable, religious, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals.
In conclusion, the article emphasizes the importance of claiming charitable contributions as itemized deductions and provides key information on the limits, rules, and documentation requirements for both cash and non-cash donations. It serves as a valuable guide for taxpayers looking to maximize tax savings through charitable giving in the 2023 tax year.
