Last year, charitable donations in the U.S. totaled $471 billion, a 5.1% increase from the previous year. This, despite—or maybe because of—the pandemic and associated preventative measures had forced many folks out of work. More than two-thirds of giving—or $324 billion—came from individuals.
Individual taxpayers have reached into their pockets more often lately, with gifts increasing in five of the last six years. It’s a surprising—and encouraging—trend, considering that the tax incentive for charitable giving had been reduced for some taxpayers with the doubling of the standard deduction as of 2018.
If you’re considering making a year-end gift, here are some tips to make your donation tax-favored.
Claim a Deduction Even if You Do Not Itemize
To claim a charitable deduction on your tax return, you must typically itemize your deductions on Schedule A of Form 1040. However, if you—along with 90% of taxpayers—don’t itemize your deductions, you still have the chance to claim a charitable deduction in 2021.
A temporary change in the law means that single filers and married taxpayers filing separately can deduct up to $300 for cash contributions made to qualifying charities during 2021. The potential deduction ticks up to $600 for married taxpayers filing joint returns.
A similar opportunity was available to taxpayers in 2020, but there was an overall limit of $300 for most taxpayers—and $150 for those married taxpayers filing separately. That deduction was characterized as an above-the-line deduction on your Form 1040.
For 2021, however, the deduction has not only increased but has moved below the line. Don’t worry—it’s still located on the front page of your Form 1040 and doesn’t require you to itemize.
For purposes of the deduction, cash donations are those made by check, credit card, or debit card. Cash deductions don’t include securities, household items, or other property. And while cash contributions to most charitable organizations qualify, those made to supporting organizations and donor-advised funds do not.
Bundle Your Gifts
If you donate more than $600 to charity in 2021, consider a gifting strategy like bundling. Since the doubling of the standard deduction has reduced an incentive to itemize, you may not benefit by making a single charitable gift. But bundling your gifts—or making large gifts less frequently than regular annual gifts—can be impactful. For example, if you normally donate $5,000 to charity each year, consider giving $15,000 in one year and skip the next two. Your total donation is the same, but if you coordinate it with your other potential itemized deductions—like medical expenses—you can take advantage of the deduction in a year you itemize.
Do Your Homework
Only donations made to qualified charitable organizations are deductible. If you’re not sure whether your favorite organization qualifies, see if you can locate a determination letter from the IRS: Many organizations will post their letters on their website.
You can also check the status of a charitable organization with the IRS’ Tax Exempt Organization Search tool. While this used to always be the fastest way to verify tax-exempt status, this is only true for older organizations. The IRS is advising taxpayers to expect delays in data updates, as they are still processing paper Forms 990 received in 2020.
You can also call the IRS toll-free at 1.877.829.5500—but expect to wait.
Keep in mind that churches, synagogues, temples, and mosques are considered de facto charitable organizations and are eligible to receive deductible donations even if they’re not on the list—exceptions may apply, so ask if you’re not sure.
You can’t deduct charitable gifts made to individuals, no matter how deserving. This includes handouts to the homeless and collections at the office or in your neighborhood for those experiencing tough times—including pooled funds for those who experienced a tragedy such as an accident or fire. The same is true for donations to individuals made through platforms like GoFundMe to assist with healthcare or other expenses due to the pandemic. If the tax deduction is important to you, donate through a qualified organization.
Your Time is Not Deductible
Volunteering is great, but the IRS doesn’t allow a charitable deduction for your time, even if you can easily quantify it. So if, as an accountant, you normally charge $300 per hour and you use that time to help a qualified charitable organization, your deduction is $0. The same rule applies whether you’re a lawyer, doctor, artist—or editor.
That said, out-of-pocket expenses relating to volunteering are deductible so long as they’re not reimbursed to you or considered personal expenses. Out-of-pocket charitable expenses that might be deductible include parking fees and tolls, other travel expenses, and supplies used in the performance of your services. Mileage is also deductible—but just 14 cents per mile. The rate is currently fixed by Congress and is never adjusted for inflation.
Consider Donating Appreciated Assets
Donating property that has appreciated can be a tax win-win: Not only will you be entitled to a charitable deduction, you will avoid paying capital gains tax on the appreciation.
Here’s how it works. Let’s assume you want to donate appreciated stock worth $10,000 to charity that you initially bought for $1,000. If you sell the stock before you donate it, you’ll owe tax on the appreciation—in this case, $9,000. If you assume a 15% capital gains tax rate—the long-term rate for most taxpayers—you’ll need to shell out $1,350 in tax, leaving you with after-tax gains of $8,650. Donating that amount to charity nets you a charitable deduction of $8,650.
If instead you donated the $10,000 of appreciated stock directly to the charity, the charity would pocket the entire amount—and pay no tax. Additionally, you’d owe no capital gains tax and would get the benefit of the full $10,000 charitable deduction.
The result is not the same for depreciated assets. If your assets have decreased in value, it may make sense to sell first and then make the donation. That allows you to preserve the capital loss and claim the remaining charitable deduction.
Don’t Forget About Retirement Assets
Outside of your home, your retirement account may be the most valuable asset you own—and you can tap them for charity. Typically, if you want to make a donation from your IRA, you’d have to withdraw the cash, pay the tax due, and then make the donation. This is not tax advantageous.
There is, however, an important exception: IRA owners who are aged 70½ or older can transfer up to $100,000 per year to an eligible charity, tax-free. If you file a joint tax return, your spouse can also donate up to $100,000 tax-free.
The transfer also counts toward your required minimum distribution, or RMD, for the year. Keep in mind that if you don’t donate the full value of your RMD, you will need to make up the difference or be subject to a penalty.
Funds must be transferred directly by the IRA trustee to the charity, sometimes referred to as a charitable rollover or charitable distribution. You’ll report this on your tax return as an exception. But the donation must be made directly from the account—if you pull out the funds and write a check to the charity, you don’t qualify for the exception.
Additionally, you may not use a charitable rollover to make donations to donor-advised funds (DAFs), supporting organizations, and private foundations.
Cash donations must be substantiated by a bank record, like a canceled check or credit card receipt, clearly annotated with the name of the charity, or in writing from the organization. The writing must include the date, the amount, and the organization that received the donation.
You can generally take a deduction for the fair market value of non-cash items donated to charity. If self-documenting gifts of less than $500, be specific, noting the description and condition. If you contribute property worth more than $5,000, you must obtain a written appraisal.
As a best practice, always ask for a receipt.
If you donate cash in 2021 to charity—but not a DAF or private foundation—you can claim up to 100% of your taxpayer’s adjusted gross income, or AGI. Previous law limited charitable contributions to 60% of AGI.
Time is Running Out
If you want to claim a charitable deduction this year, gifts must be made by December 31, 2021. Credit card charges—even if they’re not paid off before the end of the year—are deductible so long as the charge is captured by year-end. Similarly, checks written and mailed by the end of the year will be deductible in 2021, even if they aren’t cashed in December.
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.