Charitable giving is a tradition deeply entrenched in society and many governments around the world encourage philanthropy by giving tax breaks to those who donate to registered charities.
The federal government gives Americans tax breaks though specific rules have to be followed to make the most of these breaks. It is a classic example of a win-win situation as you feel an inner glow for doing good and the government rewards you by lowering your tax.
One of the most important expectations of the IRS is that you itemize your deductions to registered charities. If your itemized deductions are less than the standard deduction, you don’t get a tax break.
Tax years 2020 and 2021 have a special provision where cash payments up to $300 in 2020 and $600 for joint fillers of tax forms need not be itemized. This rule will expire in 2022.
For public and private charities that meet select criteria up to 50% of adjusted gross income (AGI) gets a tax break. For private charitable organisms that do not meet appropriate test the AGI limit is 30%. Donating stocks lowers the limit to 30% and 20% for stocks and long-term gain property for public and private charities. However, full market value of assets rather than buying price is calculated.
Cash attracts the largest tax break; up to 60% of AGI. Tax year 2020 has a unique rule where cash gifts can attract 100% deductions when given to approved public charities. This is a rare occurrence and opportunity for Americans.