A New Rule Makes It Easier to Claim Donations on Your Taxes This Year—Here’s What an Accountant Wants You to Know
As 2020 comes to an end, it’s a good time to reflect on the few things from this year that made you feel good, starting with what you may have done to give back to others. Nearly three in four U.S. adults donated money to a charitable organization in the past year, according to a Gallup poll, and if you were one of them, you could save some money on your taxes—if you come prepared. While you have until April 2021 to file your taxes, there are a few things you can get together now to make that race to the tax-day deadline a little bit more manageable.
This weekend: Decide how you want to claim your deductions
The first step is to decide whether you’ll be itemizing your deductions or claiming the standard deduction on your 2021 taxes, which means you’ll lower your income on your taxes by one fixed amount. (For single taxpayers, that’s $12,400.) If you itemize your deductions, on the other hand, you’ll add up all of the eligible expenses you can claim to lower your income on your taxes. Basically, if you think your spending over the past year qualifies you for more than $12,400 in deductions, you’ll want to itemize your deductions.
Typically, you want to claim whichever deduction lowers your tax bill the most. And before you freak out over needing to do math, this actually shouldn’t be a foreign concept: This is a decision you’ve had to make every year, but this year, this a bit more spice in the decision-making.
“Due to the CARES Act that was passed on March 27, there were changes on how you can deduct charitable contributions made in 2020 on your tax returns,” Sydelle Harrison, a Certified Public Accountant (CPA) in California, told Apartment Therapy. “Prior to the passing of the CARES Act, basically, charitable contributions would only be beneficial if you were itemizing your deductions on your tax return.”
What does the pandemic-era update mean for you? If you take the standard deduction, you can still account for the donations you made this year of up to $300 for cash contributions to qualifying organizations. (Cash here means anything that took money out of your checking account or wallet.) It changed things a bit for folks who itemize their deductions, too. Previously, you could only deduct 60 percent of your income when donating to public charities, but now you can deduct 100 percent. So, say you make $100,000 a year. Previously, you could donate as much money as you wanted to public charities, but you could only deduct $60,000. In 2020, you can deduct $100,000 on your taxes. And, if you donated more than your total yearly income, those contributions can be carried onto your future tax deductions for up to five years.
“Especially with the CARES Act, and the new 100 percent deductibility of donations, it could reduce your income, if possible, a lot and pay very little taxes,” Harrison said.
Know the difference between standard deductions and itemized deductions
If you aren’t sure if you’re going to itemize your deduction or take the standard deduction, the easy question is to ask yourself is how much money you think you can deduct if you itemize. If that number is larger than the standard deduction of $12,400, then you might be able to save some money itemizing! If it isn’t, you’ll likely save time and money by simply taking the standard deduction.
So, if you donated under $300, and have no other deductible income like medical expenses or mortgage interest deductions, you’ll end up saving more money by taking the standard deduction and adding on that $300 charitable donation deduction.
If this decision seems a little bit difficult to sift through, call an accountant! It’s never too early to get lined up with a professional to help you through tax season. And either way, if you made any charitable donations in 2020, you can get a head start on working through those now.
Next weekend, collect those receipts
Once you’ve made your tax plan—including deciding on if you’ll be itemizing your deductions or taking the standard deduction, and finding a tax accountant if you think that’s the right move for you—it’s a great time to start looking for receipts of any donations you may have made over the past year. Whether your donations were big or small, they can certainly add up.
Key in getting prepared is to organize all of your receipts. Most charities will have sent you an email confirming your donation, and others might have sent it via snail mail, but you’ll want to collect all of them together so you can count up the total.
“Gathe the receipts for your personal records, make a folder on your computer, maybe make an Excel, or put all the receipts in a folder on your email,” Harrison recommended. “On your tax returns, you [don’t typically] have to attach receipts of your donations, you just have to write them now.” While you won’t have to provide an itemized list of your individual donations on your primary filing, it’s helpful to know the exact number, and to hold everything in one place should you need it later. Right now the receipts, Harrison added, are “just for yourself and remembering how much you’ve donated throughout the year.”
Collect the receipts, whether they be physical, screen shots, or PDFs, in a way that makes sense to your personal organizational habits—whatever you’re most comfortable with is a system you’re likely to stick to.
Check that your donations qualify in the eyes of the IRS
“It’s important to keep track of all your receipts, and the organizations that you’ve been donating to, and also making sure that the organizations that people are making donations to are qualifying organizations for the IRS,” Harrison said.
Some donations will be fully tax deductible, while others aren’t. One way to check is to use the tax exempt organization search through the IRS’s website.
Figuring this out matters, as you want to only include qualifying donations alongside work-related education expenses, business use of your home, and a whole host of other things that you spend money on during the year which can be subtracted from your overall income. Claiming these purchases as expenses can lower your taxable income, thereby lowering your tax liability, according to Harrison.
“So say your original tax percentage was like 15 percent, but you’ve donated so many charitable contributions and you’ve adjusted so much from your adjusted gross income,” she said. “It lowers your income so significantly that it brings you down to a different tax bracket. Now you’re paying less in taxes.”
Tally your total deductible expenses, and prepare to file
Once you’ve collected all your receipts into one place and confirmed they’re all deductible, now is the time to add them up! If you’re taking the standard deduction, you can deduct up to an additional $300 in donations; if you’re itemizing your deduction, you can simply deduct the entire total of the donations you made.
If you’re planning on filing your taxes on your own, you’re all set! If you’ve decided to work with an accountant, let them know you’ve done some work ahead of time, and send along your total.
“A lot of [tax] information isn’t available to you until February,” Harrison said, but she recommends you connect with someone you trust now. As she noted, accountants “fill up [and] they only have a certain amount of capacity, so lining someone up now would be a good idea. And then in February, when you receive all your forms, having all that information ready to go, you can just send it over to your accountant to prepare your tax return.”
Hold space for holiday and/or last-minute donations
2020 isn’t over yet, and if you’re looking to buy holiday gifts, consider donating to a charity in someone’s name—there’s nothing like a gift that gives back. It’s also beneficial for you, too: Donations made in someone else’s name are tax-deductible for the person who donated, not for the person they gifted to.
“In the times right now, I think [gifting a donation] is a great way to give back to the community and also do it in someone else’s name,” Harrison said. “It’ll be beneficial to [them] tax-wise and to an organization that’s going to make a difference.”