How to Deduct Charitable Donations From Your Taxes

The stimulus bill gives taxpayers the ability to receive a $300 deduction for donations in 2020.
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The federal coronavirus stimulus bill, known as the CARES Act (Coronavirus Aid Relief and Economic Security Act), is giving taxpayers the ability to receive a $300 deduction for donations even if they don't itemize their taxes in 2020.

The change benefits taxpayers who take the standard deduction - it’s up to $300 for individuals and $600 for those who are married and file jointly.

The CARES Act was signed into law in March and increases the limit on an individual taxpayer’s deduction for cash contributions to public charities from 60% of their adjusted gross income to 100% of their adjusted gross income. The CARES Act increases the limit on a C corporation taxpayer’s deduction for cash contributions from 10% of the corporation’s taxable income to 25% of the corporation’s taxable income, said Stephanie Casteel, a partner at Snell & Wilmer, a law firm in Reno, Nevada.

The law also increases the limit on deductions for charitable contributions of food from a taxpayer’s trade or business from 15% to 25% of the taxpayer’s taxable income.

In the past, taxpayers could not take a charitable deduction unless they itemized.

“The CARES Act changes this by allowing taxpayers who do not itemize to deduct up to $300 of cash contributions to public charities with an above-the-line deduction in tax years beginning in 2020,” she said.

This provision is not limited to year 2020 and applies to all future years as well. The increased limits under the CARES Act are available only for cash contributions (other than the donation of food from a taxpayer’s trade or business).

“For purposes of the new rules, donations of stock, real estate or other non-cash items would not fall under the increased donation limits,” Casteel said. “Any donation for which equal quid pro quo is provided to the taxpayer is not a donation for charitable donation purposes.”

During the COVID-19 crisis, many people who are in a position to give are looking for ways to help their communities, said Rick Swope, senior director, investor education of E-Trade, an Arlington, Virginia-based brokerage company.

While using money in the bank may be one way to fund a donation, investors should consider donating shares from their brokerage or retirement accounts.

“This strategy could help lower your tax bill and because you don’t pay capital gains on donated shares, you’re able to put more of your money to work at the charity of your choice,” he said. “Donating shares may not be the first consideration for investors, but it’s a simple process that can help do some good and potentially alleviate your year-end tax obligations.”

A credit card twist on this is that you could redeem rewards for cash back and then donate that money, effectively putting “free money” to good use and getting a deduction for it, said Ted Rossman, an analyst for CreditCards.com, an Austin, Texas-based company.

“Generally, credit card rewards are not taxable (when you receive them) or tax-deductible (when you give them away), but this is a legitimate way to do good and put some money back into your own pocket at the same time,” he said.

While they are not deductible, some people might find it makes sense to directly donate some of their credit card points or airline miles.

“This puts them to good use, extends the expiration date of your remaining points/miles and doesn’t require you to spend actual money at a time when your budget may be especially tight,” Rossman said.

American Express  (AXP) - Get Report is a good example - they're currently matching all membership rewards points donated to Feeding America, he said. United Airlines  (UAL) - Get Report is also matching miles donated to COVID-19 relief campaigns, such as Operation USA COVID-19 Response, which is providing medical supplies and other necessities to healthcare workers and consumers in need.

Avoid Being Audited

Here are some red flags that alert the IRS auditors.

Donors cannot claim a deduction for any contribution of cash, check or other monetary gift made unless the donor maintains a written record of the contribution.

A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. Charitable organizations must provide a written disclosure statement to donors of a quid pro quo contribution in excess of $75.

Document all your donations throughout the year, even if you make them online.

Make sure the donation is made to a qualified public charity, said Claudia Sotolongo Gonzalez, a senior manager, tax professional at Kaufman Rossin in Miami. The IRS link for public charities provides taxpayers with supporting documentation for donations.

“The best advice would be to have the right supporting documents for your donations as well as everything else that goes on your tax return,” she said. “Most importantly, use a qualified CPA for tax advice. They’ll be able to provide guidance and tax planning.”