Taking a Charitable Donation Tax Deduction: Is It Right for Your Tax Situation?

Can you take a charitable donation tax deduction on your federal return?

Standard deduction vs. itemized deductions: which one?

To itemize or not to itemize: that is the question.

You can only take a donation tax deduction on your federal tax return when you itemize.

So which one should you choose — the standard deduction or itemized deductions? That depends on your unique situation. Generally, if deductions from charitable giving and other activities exceed the standard deduction, then itemizing is the best tax-savings strategy for you. If this is not the case, the standard deduction may be a better option for your tax situation.

For your 2023 tax return, the standard deduction for Federal income tax purposes is as follows:
● Single taxpayers and married couples filing individually: $14,600
● Married couples filing jointly: $27,700
● Heads of household: $20,800

Work with a CPA to help you determine which tax deduction strategy is best for you.

But wait! Even if you choose the standard deduction for your federal tax return, certain states offer tax-savings incentives for charitable giving. We cover this topic below.

Deciding to itemize? Keep reading to learn which charitable donations can be deducted from your tax return.

Deductions for cash donations

Cash donations to qualified organizations can be deducted from your tax return — up to 60% of your adjusted gross income for your 2023 tax return. A deduction decreases your amount of taxable income, prior to calculating the tax you owe.

For a donation to be deductible, the recipient organization must qualify for tax-exempt status as stipulated by the IRS. Use this tool from the IRS to determine if a charity qualifies under tax law.

Proper record keeping is critical in case the IRS ever audits you. Some examples of cash donation records include:
● A bank or credit card statement
● A paper or electronic receipt
● Payroll deduction records

For all of these records, your name, the organization’s name, donation date, and donation amount must be included.

If a charity gave you services or goods in exchange for the donation, this is known as a “quid pro quo” deduction. For example, if you received a ballcap in exchange for your donation, the fair market value (FMV) of that ballcap must be calculated into the deduction. If you donated $20, and the FMV of the ballcap is $10, then you can only deduct $10 of your donation.

For cash donations over $250, there are extra requirements. You must receive written acknowledgement from the charity that includes the donation amount, and whether the charity gave you any goods or services in exchange for the donation. If so, an estimate of the FMV of these goods or services must be included in this written acknowledgement.

Deductions for donated items

Yep, your Goodwill drop off can be deducted. Donation tax deductions are allowed for contributions of goods, like clothing or household items. The deduction is limited to the FMV of the items at the time of the donation. Be sure to collect a receipt — including name of the organization, date and location of the donation, and a description of donated goods — when you donate.

If you claim more than $500 in total deductions from donated items, you must file Form 8283 with your tax return to provide the IRS with additional information related to your donation of noncash items

For donations of goods valuing more than $250, you’ll need what the IRS calls “contemporaneous written acknowledgement.” What exactly does this mean? According to the IRS, “To be contemporaneous the written acknowledgment must generally be obtained by the donor no later than the date the donor files the return for the year the contribution is made.”

This written acknowledgement must include:
● Your name
● The organization’s name
● A description of the items
● The FMV of the item(s) donated

If this is a quid pro quo contribution, the written acknowledgement must also include a good faith estimate of the value of the goods or services the organization provided in exchange for the donated item(s).

If the FMV of the donated item exceeds $5,000, in addition to the above contemporaneous written acknowledgement, you’ll also need a qualified appraiser to provide written appraisal of the donated item.

Are there state tax benefits for charitable donations?

Some states, like Arizona, have tax-saving opportunities to encourage giving to local charities. Arizona offers an income tax credit for contributions to qualifying charitable organizations. A tax credit reduces the amount of tax you owe, or increases your refund. For your 2023 state tax return, Arizona single tax filers or married couples filing separately can claim up to $421, while married taxpayers filing jointly can claim up to $841. Use Form 321 to claim this tax credit.

You can learn more about Arizona’s charitable giving tax credit here. Other states, like Colorado and Minnesota, have similar charitable giving tax incentives.

Important: Many states have lower thresholds than the IRS when determining whether a taxpayer should itemize their deductions or claim the state-allotted standard deduction. Because of this, we recommend keeping the required records of your charitable donations, even if you do not itemize for federal income tax purposes. Otherwise, it could cost you additional state income tax in these situations.

Maximize your giving beyond cash and good donations

Donations of cash and goods aren’t the only ways to give. Here are 5 other smart charitable giving strategies to maximize your impact and reduce your tax liability.