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Tax Season Is Approaching — We Answer 3 Questions About Deductions
With the turning of the calendar comes the start of tax season, where people collect their W-2s and 1099s and prepare for the process of filing income tax returns. For many, a big part of that tax filing process is deductions, and here are three reader questions on that topic.
1. What if you don’t have receipts for tax deductions?
When COVID started, I started donating food to the food pantry in town each month when I would go to Costco. I just picked up $100 or so in items each time from their needs list and dropped them off. Now I realize that they never gave me a receipt for the donation. Can I deduct these donations if I don’t have a receipt?
You can only deduct food donations from your taxes if the food items were given to a qualified charity, so the first thing I would do is contact the food pantry and make sure that it is a qualified charity. You can also search the IRS database of qualified charities to see if the food pantry is listed there.
Provided that the food pantry is a qualified charity, you can ask it directly to provide you a receipt for the donations. However, it is very unlikely that it kept track of your specific donations unless you made an individual donation of more than $250. Why is $250 important? For donations larger than $250, the charity is legally required to give the donor a written acknowledgment of the donation. However, you appear to have made a series of smaller donations that add up.
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Thus, the best approach for you would be to go to the Costco website, pull up all of your receipts throughout the year, itemize everything that you donated from those receipts, and pull them all together in a single list. So, if you donated seven items from an April trip to Costco that totaled $103.42, just write down “April donation: $103.42” on your list. After you have all of the donations pulled from your Costco receipts, take that list to the food pantry and ask if someone can sign a receipt for you for those donations. If the pantry knows you’ve donated in the past and you come in with such an itemized receipt, it’ll likely do this for you.
You may want to use a food donation receipt template, leaving the line blank for the signer, and then bring it with you to the food pantry the next time you donate and ask the person receiving your donation to sign for it, or else stop by the food pantry and ask for a signature.
If it doesn’t sign the document, you can still deduct it from your taxes, but the donation may be called into question if you are audited. You can show the receipts of your purchases from Costco, but you’ll still be reliant on the food pantry verifying your donation if the IRS calls the pantry. This is relatively unlikely to happen, however, unless you’re being audited for other reasons.
2. Should I deduct my mortgage interest?
What are the drawbacks to deducting your home mortgage interest? Why wouldn’t everyone do it? Feels like there must be a catch.
When you go to file your taxes, the federal government gives every single taxpayer two options.
First, you can choose to take the standard deduction. This is a standard amount offered to everyone. If you choose this option, you don’t have to make a list of your tax deductions at all.
Alternately, you can choose to itemize your deductions. If you choose this option, you have to make a list of all of your deductions and see what they add up to.
Usually, people choose the option that gives them the largest deduction. If you have enough deductions such that they add up to more than the standard deduction, you’ll itemize your deductions. If you don’t have enough, you’ll just take the standard deduction.
The Tax Policy Center reports that around 90% of Americans took the standard deduction on their 2018 taxes, the most recent year for which it has an estimate, and with the standard deduction even higher in 2021, the vast majority of Americans will choose the standard deduction — yes, even homeowners with a mortgage.
So, the drawback to deducting your mortgage interest is that you miss out on the standard deduction, which might be even bigger. You’ll want to choose the bigger option, and even with a mortgage, it may very well be the standard deduction.
3. Why donate when you take the standard deduction?
What is the purpose of donating if you are taking the standard deduction? There is no tax benefit for charitable donations if you just take the standard deduction. Seems like most people aren’t incentivized to donate.
First of all, the purpose of donating to a charity is to help some charitable cause. The fact that the donation is tax-deductible in many cases is like icing on the cake.
However, Sam’s question hits upon a broader issue of why charitable donations don’t reduce the tax bill of people taking the standard deduction. That’s because the standard deduction assumes some amount of charitable donation from the average person. A standard deduction really means that for the ease of the IRS and tax filers, the IRS is willing to assume that you did a certain amount of tax-deductible things this year, including charitable donations.
Of course, by offering that, the IRS doesn’t really incentivize people who will take the standard deduction (at least 90% of Americans, as noted earlier) to actually do things that are tax-deductible, since they’ll just take the standard deduction anyway. If you’re taking the standard deduction, charitable donations usually don’t reduce your tax bill.
However, for your 2020 taxes (which most of us will file in early 2021), however, there is a special exception. Thanks to the CARES Act, taxpayers who made cash donations to qualified charities up to $300 in total in 2020 can deduct them from their taxes, even if they are taking the standard deduction. This is a special one-time-only thing, meant to encourage extra donations in 2020.
Remember, the real reason to donate to any charity is to help others. Treat any tax benefits as icing on the cake!