Well it’s that time of year and April 15 is just around the corner. Between March 15 and April 15 clients reach out to us about claiming their previous year’s charitable gifts on their personal income tax return, Form 1040. So, here you go . . .
When a charitable contribution is made to a qualified organization, a taxpayer may be eligible for a tax deduction if the taxpayer itemizes their deductions on Schedule A of the Form 1040. If the taxpayer receives a benefit in exchange for the contribution such as merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, the taxpayer can only deduct the amount that exceeds the fair market value of the benefit received or expected to be received. Here’s how you generally report charitable gifts:
- Keep Records: Make sure to retain records of all your charitable contributions. This includes receipts, canceled checks, bank statements, or acknowledgment letters from the charities.
- Determine Eligible Charities: Only contributions made to eligible organizations qualify for a tax deduction. Most churches, nonprofit schools, hospitals, and charities are eligible. Gifts to individuals are not deductible. You can verify the eligibility of an organization using the IRS’s Exempt Organization Search Tool (https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations)
- Itemize Deductions: Charitable contributions are only deductible if you itemize deductions on Schedule A. If your total itemized deductions exceed the standard deduction amount for your filing status, it’s usually beneficial to itemize.
- Report on Schedule A: On Schedule A, you’ll report your charitable contributions on line 10a (for cash contributions) and line 10b (for non-cash contributions). For cash donations over $250, you must have a written acknowledgment from the charity.
- Limits and Rules: There are limits on how much you can deduct for charitable contributions.
- Generally, you can deduct up to 60% of your adjusted gross income (AGI) for cash contributions and up to 30% of your AGI for donations of appreciated assets like stocks or real estate.
- In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations. For any contribution of $250 or more you must obtain and keep in your records a contemporaneous written acknowledgment from the charity indicating a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services.
- Documentation: Make sure you have proper documentation for each contribution. For contributions of cash, check, or other monetary gift (regardless of amount), you must maintain a record of the contribution: a bank record or a written communication from the qualified organization containing the name of the charity, the amount, and the date of the contribution.
Tax laws directly impact an individual’s personal financial plan. At Paraklete® Financial we work with CPA’s as part of our client’s collaborative team of advisers. The collaborative team is essential to the personal financial planning process. For more information, please visit us at https://www.parakletefinancial.com
