What Are Tax Deductible Donations, and How Do They Work?

When you give to charity, you might be eligible for a tax deduction (a fancy way of saying your taxable income is lowered).

charitable tax deductions
Getty/ Morgan McMullen

Donating funds—if you’re able—to worthy causes has never been more important. With the crucial Black Lives Matter movement sweeping the nation, your generosity supporting aligned nonprofits will help effect change. Or maybe you’re donating to front line workers and COVID-19 relief funds—an important step to help quell the virus that’s taken the lives of so many. Either way, allocating some of your income, if you can, to charity is a great way to make an impact in the issues that matter most. It may also make you eligible for a tax deduction.

So, what is a charitable tax deduction?

When you donate money to a charity, that money is usually tax deductible. In a very basic sense, what that means is that the amount you donate is subtracted, to a degree, from your taxable income. Let’s consider a very basic scenario: If you make $50,000 a year and donate $1,000 to charity, theoretically you only have to pay taxes on $49,000. To qualify, the charity you donated to must be eligible with the IRS, generally a 501(c)(3) recognized organization. Usually, a nonprofit will state whether they meet the criteria on their website—just remember, just because a charitable organization is a nonprofit, that doesn't mean it’s necessarily a 501(c)(3).

What do I do after I've donated?

So you donated—what comes next? After you donate, save your receipts—you’ll need them to file for a charitable deduction come tax season. To submit your charitable contributions for deductions, you need to itemize your giving in a dedicated section on what’s called a Schedule A form (otherwise known as a 1040 or 1040-SR). On that form, you list a variety of things you paid for over the year, like medical and dental expenses, state and local taxes, interest on thinks like mortgage and loans, and more, including charitable giving. The total of that form (so, total combination of deductions from all of the areas listed above) is what you’re eligible to receive in a tax deduction.

There's a hitch: Every person who files taxes qualifies for a standard deduction—a dollar amount that everyone gets to subtract from their income before income tax. This standard deduction varies depending on your marital and household status. Let’s say you’re a single person filing—in 2020, you automatically get a standard tax deduction of $12,400, meaning $12,400 is automatically subtracted from your income (and the remaining income is taxed). Unless the total from your Schedule A form is greater than what you would already get in a standard deduction (so, totals $12,401 or more—which is unlikely if you’re early on in your career and don’t own a home), you won’t get any additional tax deductions for charitable contributions—it’s already factored into your standard. Think of a standard deduction as a blanket catch-all—unless you exceed that number, you're already, automatically, getting a write off.

But things are changing in 2020...

Starting in 2020, there’s actually a new initiative being put in place. Enacted because of the CARES act (The Coronavirus Aid, Relief, and Economic Security Act), now you can actually deduct up to $300 worth of donations, without having to itemize, in what’s called an “above the line” deduction. What that means is if you’re under that standard we talked about above (using the example above, your total deductions don’t exceed $12,400) and you’ve donated to charity within 2020, you can get an additional deduction of $300 for donations. So that means if you donated, say, $600 dollars, $300 will be deducted from your taxable income, regardless of whether you met the standard criteria. This act is meant to encourage you to donate if you’re able, and to support the organizations that need funds most.

I’m committing a lot of my income to donating. What about me?

Feeling extra generous? If you have the means and are able to donate a large sum of money (which again, exceeds the total of your standard deduction) you may get charitable deductions of to 50 percent of your income (Simple illustration: If you’re a single person making $100,000 and your Schedule A totals greater than $12,400, and you can, under normal circumstances (there are certain restrictions) write off $50,000 worth of donations). If your charitable contributions exceed the limit (go you!), you can usually deduct them on your tax returns over the following five years in what’s called a carryover.

Donating to causes that matter is important. Even if your donation doesn’t end up impacting your tax return due to the standard deduction, it’s still impacting lives and movements around the world. And that’s priceless.

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