Many Americans across the nation look at the end of the year as an opportune time to convey gratitude by making charitable donations. It is estimated that 30% of annual giving happens in the month of December, and 10% in the very last three days of the year, as stated by Nonprofits Source, a digital marketing consultant for nonprofits.
When you are able to claim a charitable tax deduction depends entirely on how and when you donated. Gifts made at the end of the year can be tricky, but the Internal Revenue Service (IRS) lays out specific situations to help make claiming a charitable tax deduction less confusing.
Donations to charities, like Giving Center, are deductible on your taxes for the year you donated. Here's a quick example:
Let's say you donate clothing to a charity on Dec. 31, 2019. You must claim this deduction for your 2019 taxes. In contrast, if you donate to a charity on Jan. 1, 2020, you will have to claim the deduction on your 2020 taxes.
When Giving Cash
U.S. Postal Service delivery. If you are mailing a check to a charity through the post office, your donation is good for tax-year 2020 only if the postmark on your envelope or package is before midnight on Dec. 31, This is to conform with the Treasury Department’s “delivered when mailed” rule.
Be wary, do not just drop your envelope in the mailbox; it is possible it might not get postmarked until Jan. 2. If you have found yourself working against the clock, it is better to send it registered or certified mail. Make sure to keep the receipt and a copy of your canceled check to keep on file. Another option is to send it via Express Mail.
Delivery by private mail service. If you are sending a check to a charity through private services like UPS, the IRS’ rule of “delivered when mailed” does not apply. However, it does apply when you send a tax return via private mail service. So if you decide to send a check with this method, you will need to contact the charity you are donating to on or before Dec. 31 to make sure that it has received your payment. If it's possible, ask for a confirmation via email.
Credit card. If your charitable donation appears on your credit card statement as a December charge, it is good for 2020. That is the case even if the charity does not get around to processing your donation and sending you your receipt until January.
Text message. If you donate to a charitable mission by putting a code into your cell phone, the donation date will later appear on your cell-phone bill. If the donation shows up as a charge on your cell-phone bill made before Jan. 1, you can itemize it for 2020.
Pay-by-phone account. In this scenario, you respond to a text message by linking to a mobile-optimized web page that takes your credit card information. The date of the charitable donation is the same as when you pay by credit card. Again, it is good if it is no later than Dec. 31. You will find that date on your credit card statement.
Donating Investment Securities
Electronic transfers of securities. If you direct your broker to transfer securities to a charity, it will be considered a done deal only when the funds are transferred from your account into another account. Stock and illiquid assets can not be in transit; someone has to own them.
The electronic transfer of ownership takes place almost immediately with investment securities. Larger charities tend to have their own brokerage accounts, this means transferring securities from your account to the charity’s happens as soon as your broker puts forward your order.
If you happen to be donating to a smaller charity without a brokerage account and are worried about your donated stock counting toward the current year’s deduction, you may want to consider contributing through a donor-advised fund.
A donor-advised fund is similar to a charitable savings account; you transfer your securities into it and receive a tax deduction immediately. You can then take your time deciding where the money should go. When you have decided where the money will go, the fund takes responsibility for giving out your securities to the charities you have named.
Your charitably donated securities are eligible for a tax deduction the very moment you have transferred them to a donor-advised fund. This is because the fund is itself considered a charity by IRS standards. The value of your charitable donation for tax purposes will stay the same even if the securities end up dropping in value by the time they are actually distributed to your chosen charity.
Donor-advised funds are suitable for anyone who receives a significant tax benefit from charitable giving.
Stock certificates. In the rare case that you are donating stock certificates, you will need to make sure you have properly endorsed them; be sure to check with the issuing corporation for proper directions. If you decide on mailing the certificates yourself, it will follow the same rules as a mail-in check: the donation date is the same as the postmark date.
There are limits to the amount of charitable contributions allowed during a single tax year. Your total charitable deductions are limited to 50% of your adjusted gross income (AGI). Furthermore, only donations to select organizations will qualify for the highest limit. Charitable gifts to certain qualified conservation organizations might be eligible for a higher limit.
Examples of organizations that are eligible for the 50% AGI limitation include churches, educational institutions, and hospitals. A lower limit, of 30% of your AGI, applies to various other types of charitable groups. Examples of organizations that fall into this category are veterans’ organizations, fraternal societies, nonprofit cemeteries, and certain private foundations.
Your word alone is not sufficient proof for the IRS. As a taxpayer, you must keep detailed records to prove your charitable contributions. To be able to claim a deduction for cash, you have to maintain a written record, canceled check, letter from the organization, or a bank/payroll debit.
Temporary Suspension of Limits on Charitable Donations
In many cases, the amount of cash donations taxpayers may deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of that taxpayer’s AGI. Qualified charitable donations are not subject to the same limitations. Individuals can deduct qualified donations of up to 100% of their AGI. On the other hand, a corporation can only deduct qualified donations of up to 25% of its taxable income. Charitable donations that surpass that amount may carry over to the following tax year. To qualify, the charitable donation has to be:
- cash donation;
- made to a qualifying organization;
- made during the calendar year 2020
Unfortunately, charitable donations of non-cash property don’t qualify for this relief. Taxpayers can still claim non-cash donations for a deduction, but it will be subject to the normal limits.
If you make charitable donations that are over your contribution limit, you have the option to carry over the deduction to future tax returns. For instance, if you happen to donate $30,000 to a 50% organization in 2020 and your AGI is $50,000, your deduction will be limited to $25,000. You may then carry over the remaining $5,000 deduction to your 2021 tax return. You will have up to five years to claim these charitable contributions or up to 15 years if the donation was to a qualified conservation contribution.
The Bottom Line
Do not let all the rules and regulations deter you from claiming a charitable deduction. For more specific guidance about what is and is not allowed, you can download a copy of IRS Publication 526 and Form 8283 (for noncash charitable donations) for an easy reference and check the IRS Charitable Contribution Deductions to explain any potential charity contribution limits.