By Cristina Wiebelt-Smith, CPA, Associate Wealth Advisor
Generally, when filing your taxes, you can only deduct charitable contributions if you itemize deductions. However, for the 2021 tax year, individuals who do not itemize their deductions may deduct up to $300 ($600 for married individuals filing joint returns) from their income.
Nearly nine out of 10 taxpayers now use the standard deduction, so this is meant to benefit these taxpayers, many of whom probably itemized in the past. Let your tax preparer know the amount you donated to charitable organizations in 2021.
If you prepare your own return, remember to add this number to the software you’re using! Here are some tips to help you calculate that number:
- Cash contributions include donations made by check, credit card or debit card, as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with their volunteer services to a qualifying organization.
- If you buy an item for your favorite charity, it is treated as a cash donation. Bought gifts for Adopt-A-Family at Christmas? Cash donation. Bought groceries for the food pantry? Cash donation.
- Cash contributions do not include the value of volunteer services, securities, household items or other property.
- A qualifying organization includes public charities, private operating foundations and federal, state and local governments.
If you can itemize, continue to report all your cash AND non-cash donations. The deductible amount may be limited depending on your income, what was donated and the type of organization to which it was donated. Before making a large donation, check with your CPA for any guidelines or planning opportunities to be aware of. And remember to track your mileage to and from volunteer activities.
If you are thinking of a large donation, talk to us about donating appreciated stock, which gives you a deduction for the full fair market value of the stock but avoids the capital gain. There is also the Donor Advised Fund, or “DAF,” which is growing in popularity due to its simplicity and flexibility. Setting up a DAF offers a simpler strategy than setting up a charitable trust or foundation. When you contribute cash or stock to the fund, you are eligible for the tax deduction, but the funds don’t have to be distributed immediately. The funds can be invested for tax-free growth while you decide where you want to donate, providing a lot of flexibility.
There is a difference between a gift and a charitable donation. A gift is a transfer of money or property by one individual to another while receiving nothing or less than full value in return. There is no tax deduction for a gift. Giving money to your children? Gift. Paying for a grandchild’s tuition at a church-related school? Gift.
If you receive a benefit in exchange for a contribution such as merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can only deduct the amount that exceeds the fair market value of the benefit received or expected to be received. For example, if you are the winning bid at a fundraiser auction and pay $5,000 for a trip valued at $3,000, your charitable deduction is $2,000.
Did you know that several Missouri organizations offer Missouri tax credits worth 50% of your donation? For example, there is the food pantry credit, so if you donate at least $100 to a food pantry or soup kitchen, you may be eligible for a $50 credit on your Missouri return. Ask the organization for a credit letter or form, and they should know what you need. Remember to include those letters with your tax information. Other states offer similar programs, so be sure to ask wherever you live.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.