The holidays are often a time of giving. There is nothing like the warm fuzzy feeling of knowing that you are helping your community, and picking up potential tax deductions. But before you go putting every gift down as a tax deduction on your tax return, stop and ask yourself: what makes a charitable contribution deductible on your tax return? Are there limitations on what I can deduct? How about how much I can deduct? And is there anything else I should know?
Let’s dive right in.
What is a charitable contribution?
A charitable contribution is a voluntary donation, or gift, to a qualified organization, that is made without receiving or expecting to receive, something of equal value.
Well, then what is a qualified organization?
A qualified organization is a nonprofit group that can be religious, educational, charitable, scientific, or literary in purpose or that works to prevent cruelty to children or animals. The IRS has a Tax Exempt Organization Search tool that can be used to check an organization’s ability to receive tax-deductible contributions https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
Also, it is worth noting – there is the first category of qualified organizations (this would include churches, publicly supported charities, certain medical organizations, and other items like that) and the second category of qualified organizations (everything that does not fall into the list of the first category). This can impact the deduction limitations, so you must understand what type of organization you are donating to.
What are some common items that do not qualify as charitable contributions?
Not every good act is tax-deductible as a charitable contribution. Gifts to individuals, contributions to GoFundMe campaigns, the value of donated time or professional services, pledged donations (you can only deduct the amount given, not the amount pledged), political contributions, and blood donations are all common areas that taxpayers may think are deductible, but are not. If you have questions, please contact an HBK professional to discuss.
Also, note – it is common to see a partial deduction for donations given at charitable events. For example, you may pay for tickets to dinner to help a local art organization for $250. However, on the ticket, it will tell you the value that you are receiving (let’s say $50 for the dinner itself) which means that only $200 of your $250 ticket is deductible. The organization typically lists if any goods or services were received and what the value was so that you can treat this correctly.
So can I only deduct cash donations?
No! First though – to see a benefit related to charitable contributions, you may need to be a taxpayer who itemizes deduction rather than taking the standard deduction. Cash donations to qualified organizations are not the only option though. You can also potentially deduct non-cash contributions. Common examples of these would include stocks/securities, furniture, clothes, artwork, cars, and any other number of items. Often there can be worthwhile tax planning opportunities when donating non-cash items and you should discuss with your HBK tax professional. Note that if you are donating something of value, other than a publicly-traded stock, over $5,000 you will likely need a qualified appraisal.
The CARES Act did allow in 2020 for a maximum $300 deduction for those who made cash contributions and did take the standard deduction still though. This was what is known as an “above-the-line” deduction. This was extended into 2021, and expanded to $600 if you are a taxpayer with a married filing joint status – it remains $300 for single, married filing separate, etc. This means that for tax years 2020 and 2021, it is possible to have a tax deduction related to charitable contributions even if you take the standard deduction.
Can I deduct the full amount of my donation?
Now it is time for every accountant’s favorite answer: it depends. As noted above, you first must confirm that you did not receive back some value of goods or services in exchange for your donation. But then you also must consider that different donation types may allow you to deduct different total amounts of your AGI.
What are these limitations?
Let’s start with the 100% and 60% limitation – as you will see, it makes sense to discuss them together since they are based on cash donations.
If your donations for the year are 20% or less of your AGI, you will be able to fully deduct all of your charitable contributions for the year and will not be limited. If you have donated more than 20% of your AGI for the year, the potential for limitations comes into play based on what types of donations you made, and to what types of organizations.
Before 2020, the highest percentage of your AGI you could deduct based on charitable contributions would have been 60%. For the tax year 2020, the CARES Act increased this to a potential deduction of 100% of AGI. This was extended to 2021 as well and is currently set to return to the 60% limitation in 2022.
The 100% limit is applied to qualified cash contributions – that is, you cannot achieve a 100% AGI deduction by donating only stocks or other non-cash items. If you elect not to treat the donation as a 100% AGI qualified cash contribution, the limitation becomes 60% as under the pre-2020 rules.
What is the next limitation?
50% of AGI is the next limit – this limitation applied to two different scenarios (one is much more common than the other). First – if you make noncash contributions to a 50% organization, your deduction may be limited to 50% of AGI. Also, less commonly, qualified conservation contributions are limited to 50% of AGI.
It is important to note, this is calculated as 50% of your AGI minus cash contributions subject to a 60% limit. This means that if you donate cash up to 55% of your AGI, and noncash for another 5% - you will see only the 55% deduction related to cash, as you must first subtract 60% limitation items. The additional 5% related to noncash contributions would be carried into the future. Understanding the structuring of the limitations can be important for planning purposes, and it is recommended you discuss with your HBK tax professional.
I’m guessing there are more limitations still?
Correct! Capital gain property contributions to a 50% organization are limited to 30% of AGI. Contributions to the second category of qualified organizations also may be limited to 30% of AGI. And finally, noncash contributions to the second category of qualified organizations may also be limited, but this time it may be to 20% of AGI.
Well now that I know all of that – what do I need to keep as documentation related to charitable contributions?
Another great hypothetical question. Once again we look to our tried and true answer: it depends. This time it depends on what type of donation you made. For cash donations, you will need either a bank record (think canceled check, bank statement, credit card statement, etc.), a receipt (which may also be a letter or email) that lists the organization, date and amount contributed, or a record of a payroll deduction (think to pay stub or W-2). If your cash contribution was over $250, you need to have a contemporaneous written acknowledgment that has a set of parameters as well (name, date, value of services given/received, etc).
Noncash contributions have different levels of substantiation based on the amount as well. For most noncash contributions, you will need a written document showing the name and address of the organization, the date, and location of the contribution, and a description of the items (publicly traded securities should also include information about the security itself). For noncash contributions greater than $5,000 – you may be required to have an appraisal.
That’s a lot of information to process!
Yes, it is – charitable giving can be a great way to support your community as well as a great tax planning opportunity. But there can be many factors to consider, so please make sure to consult with your HBK tax advisor.
Sources: IRS Publication 526