Giving To Charity This Holiday Season? Save Your Receipts!
Tuesday November 30, 2021, is “Giving Tuesday.” Both last year and this year taxpayers who typically take the standard deduction can deduct cash contributions made to qualifying charities. For 2020 taxpayers were allowed to make an up to $300 adjustment per tax return for cash charitable contributions. For 2021 the amount has been increased to $600 for jointly filed returns. Taxpayers using a filing status other than “married filing jointly” may still take an up to $300 adjustment. In 2020 the adjustment was “above the line” meaning the amount reduced the taxpayer’s adjusted gross income (AGI). In 2021 the amount is no longer above the line (based on the currently available draft version of Form 1040) and, consequently, will not reduce a taxpayer’s taxable income, but not their AGI. Many credits and deductions have thresholds and limitations that are tied to AGI so it is important for taxpayers to understand that, while the deduction is still available and is larger this year than last year on jointly filed returns, it will not reduce 2021 AGI.
This adjustment applies to cash donations only (cash, check, credit card) for taxpayers who take the standard deduction. Donations of purchased canned food, new clothing, new toys, etc. are considered non-cash contributions and cannot be used for the purposes of the $600 deduction. In other words, if you are considering donating to a toy or food drive and usually take the standard deduction you may want to make a cash contribution to the organization hosting the drive instead of purchasing toys or food and donating them.
Taxpayers who itemize their deductions using Schedule A can still take deductions for both cash and non-cash contributions. Donation of used items to charity also does not qualify for the $600 deduction but may still be deductible if the taxpayer itemizes. Note that blank receipts or receipts that only include the name of the charity and the date of the donation are not adequate substantiation for donations of clothing and other used household items. Taxpayers should use describe what was donated and list a fair market value (FMV) for the items on each receipt. IRS Publication 561, Determining the Value of Donated Property, can help taxpayers with this task. If you are donating a car (or another type of vehicle), be sure to consult Publication 4303, A Donor’s Guide to Vehicle Donation, to ensure that you meet all of the necessary requirements to get the maximum value for your contribution.
Also remember that to qualify for the adjustment or to be deductible on Schedule A donations of cash or property must be to a qualified organization. Direct donations to individuals or causes made through web-based gifting platforms are often non-deductible. For more information on determining whether or not an organization is qualified for the purposes of deducting a charitable contribution see IRS Publication 526, Charitable Contributions, or use the IRS Tax Exempt Organization Search Tool.
Finally, keep your receipts! In general taxpayers should always keep records substantiating the date and amount of all of their deductions. But because this deduction is actually an adjustment that has its own line assigned on the 1040 it will be easy for the IRS to identify taxpayers who have taken it and to request that they prove it. The IRS will impose a 50% penalty for taxpayers who cannot substantiate the amount of their 2021 adjustment. The penalty is so steep and the ability to isolate the amount on a taxpayer’s 2021 tax return so easy that many tax professionals who typically only remind clients to save their receipts in case of an audit are requiring taxpayers to provide receipts to take this new adjustment so that the receipts will be easily accessible in the event the IRS requests proof of the contribution. In other words, taxpayers should always keep their receipts with their tax documents, but if claiming the cash charitable contribution adjustment for filers taking the standard deduction they should also provide a copy of receipts that substantiate the amount taken to their tax professional even if the tax professional doesn’t ask. Just in case the IRS asks later.