Charitable contribution deductions are tax deductions you may be eligible for due to charitable donations you gave within the tax year. The charity you donate to must be an IRS-approved charity, sometimes called a 501(c)(3) or 501(c)(4) entity. Approved IRS charities must be US-based (even if they perform work overseas) and must be formally approved. Giving money to unapproved organizations or individuals (such as giving money to a homeless person on the street) is not considered to be a charitable donation by the IRS.
Charitable deductions are generally limited to 50% of your annual income, so giving away 75% of your income to charity will still only see 50% of it being tax deductible. You can give away cash, goods, products, or property to the charity, and different rules apply for cash and non-cash goods.
If the charitable donation is a cash amount less than $250, you must have a receipt from the charity showing that you gave them the money. If the amount is $250 – $5,000, you must have a receipt and also an official letter from the charity stating the date and the specific dollar amount that you gave them. The date on the letter must be before the day that you file your tax return. The letter must also state that you received no goods or services from the charity in exchange for your cash donation. If you give over $5,000 to charity in cash, you need the aforementioned receipt and letter, as well as a signed special appraisal.
The rules are slightly different for non-cash goods, such as clothes, stocks, properties, vehicles, household items, or other things that you may donate. If you give non-cash goods to a charity that are worth over $500, you must fill out IRS form 8283, giving specific information about the goods and their value. This form is very detailed, as people have often tried to abuse it in the past and claim that their contributions were worth more than they actually were. It can be hard to value more everyday items such as clothes and appliances, though many e-filing systems use websites such as eBay to determine the value of your everyday goods.
For non-cash donations that are over $5,000 in value, there is a complicated process in place. For non-cash donations over this amount, the IRS insists that a special independent appraisal is conducted, and it is best to contact a professional tax advisor to sort this out for you.
The benefits of charitable contribution deductions are generally the same as any other tax deduction; your overall taxable income will be reduced, which thereby reduces your overall taxable liability. For example, if you earn $50,000 per year and give away $10,000 to an IRS-approved charity, only $40,000 of your income will then be subject to tax. Charitable deductions require you to itemize your tax deductions, which means that you won’t be able to apply for a tax standard tax deduction, which could make your tax filing process more complicated than normal for some people. Nevertheless, donating to charity is a noble act, and you should be rewarded with deductions!