It is that time of year again! As the new tax season rolls around, don’t forget to send the important records for your charitable donations from 2021 on to your tax preparer!
In an attempt to extend additional tax breaks for people who contributed to charity during the past year when so many needed the help, the IRS is offering higher than usual tax deductions for some taxpayers.
Why are Deductions so Important?
The government decides how much tax you owe based on your income. Let’s say you (a single person) earned income of $50,000. For someone who is single and at that income level, the government tells you to pay 5% of your income as taxes. That means you owe $50,000 x 0.05% = $2,500. 😓
A deduction occurs when the government agrees that you paid an expense (or did something positive for society) during the year that should decrease your income from $50,000 to something less. In this case, the government is told that you donated $300 worth of used clothes to Goodwill and $150 in cash to a local Women’s Shelter. To encourage that behavior and to acknowledge that you actually lost about $450 worth of your financial and personal value, the government will LOWER your income before charging you taxes. So instead of $50,000 x 0.05%, you get ($50,000 – Deduction) x 0.05%. 😊 In this way, you have a chance at paying LESS in taxes!
*These numbers are all hypothetical of course.
How much that deduction will be depends on a lot of different factors. Single people can claim different amounts than a Married couple. If you donated small items, it may be treated differently than if you donated a large item. Donating real estate may be different from donating clothes or cash.
Each year, there is also a limit on how much large your deduction can be if based on charitable donations. If you go over the limit, sometimes you can rollover the extra money towards deductions on future taxes. Of course, you will need to speak with your tax preparer about how that would work. But remember that going above and beyond might help you in the future too!
What you need to know for 2021 is that the government increased that deduction for charitable donations in certain circumstances. Regardless of what or how you donated, you need to collect your records and take them to your tax preparer to ask if you qualify.
Keeping accurate records is an important step in ensuring that your tax preparer can help you get the deduction. Records are what prove that you did donate and allows the IRS to accept your claim for the tax break. What records are necessary and when records are necessary depends on different situations. So, mention all donations to your tax preparer and find out what specific paperwork they would need from you.
You can get a head start now though, by collecting what you can of the information below. Especially if you gave cash OR had a single donation worth $250 or more (though collecting details for smaller donations is helpful too)!