Charitable Contributions
Charitable contributions of money or property may entitle you to an income tax deduction in the year of the gift.
The deduction generally is equal to the amount of cash or the FMV of property contributed. The deduction may be limited based on the type of contribution (cash or property) and the nature of the organization to which you make the contribution (for example, a public charity or private foundation). Excess charitable contribution deductions generally may be carried forward for five years subject to applicable limits.
Most deductible contributions are made to U.S. organizations described in section 501(c)(3) of the Internal Revenue Code, which generally describes nonprofit entities that are organized and operated exclusively for religious, charitable, scientific, educational, and certain other exempt purposes. These organizations are classified as either public charities or private foundations. In addition, contributions to government entities may be deductible. Note, however, that contributions to noncharitable organizations generally are not deductible. Further, with certain treaty-based exceptions, contributions to organizations formed outside the United States generally are not deductible.
Deduction Limitations
Limits on charitable contribution deductions vary depending on whether you are contributing to a public charity or a private foundation.
Public charities generally include:
- Churches, schools, hospitals, qualified medical research organizations, and qualified agricultural research organizations
- Organizations that have active fundraising programs and receive contributions from a broad cross-section of sources
- Organizations that receive income from the conduct of activities in furtherance of their exempt purposes
- Organizations that actively function in a supporting relationship to one or more other public charities (supporting organizations)
Generally, gifts of cash to public charities are fully deductible up to 60 percent of a donor’s AGI (50 percent prior to 2018), and gifts of appreciated property or gifts “for the use of” public charities are deductible up to 30 percent of a donor’s AGI. Gifts of property, when the deduction is limited to the donor’s basis, are deductible up to 50 percent of a donor’s AGI.
Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources). Private foundations generally belong to one of two categories: Generally, gifts of cash to nonoperating private foundations are fully deductible up to 30 percent of a donor’s AGI, and gifts of appreciated property to nonoperating private foundations are deductible up to 20 percent of a donor’s AGI. Gifts to operating foundations, meanwhile, are subject to the same limits as gifts to public charities.
Types of Contributions
After evaluating your tax and philanthropic goals and selecting a charitable organization, you will need to decide whether to contribute cash, services, or property. As discussed above, donations of cash generally are straightforward and limited only by the percentage deduction limitations. Conversely, deductions for services (for example, time incurred, expertise rendered, or use of property) usually are not permitted.
Contributions of Future or Partial Interests
Certain gifts of future interests in property will result in a current tax deduction. By giving future interests, you can accelerate deductions to the year of the gift while maintaining an income stream or the property for you or your beneficiaries. Charitable remainder trusts (CRTs), pooled income funds, gift annuities, conservation easements, and remainder interests in a personal residence each afford this type of treatment.
Although you cannot deduct the services you donate to a charitable organization, you can deduct unreimbursed out-of-pocket expenses incurred incident to rendering these services, including mileage for your use of a passenger automobile.
Deductions for contributions of property are also complicated. The amount of the charitable contribution deduction generally is the FMV of the property on the date of the contribution. However, your deduction for property gifted to a private foundation may be limited to your basis in that property. Additionally, if the property has increased in value, you may have to make some adjustments to the amount of your deduction. You should consult your tax adviser for assistance in determining the amount of your deduction for a contribution of such property.
A gift of appreciated property (including company stock) that has been held for more than one year generally can provide a double benefit: you obtain a charitable contribution deduction equal to the property’s FMV on the date of the contribution, and the gain is not taxable income. There are special rules for contributions of such property to private nonoperating foundations; consult your tax adviser.
In the case of publicly traded stock that you currently hold and in which you want to continue investing, consider making a donation of that stock rather than an equivalent amount of cash. If you make a charitable contribution of appreciated stock and use the cash that you otherwise could have contributed to purchase replacement stock, you will have the same charitable contribution deduction and get a stepped-up basis in the replacement stock, thus potentially reducing your taxable gain on the new stock when you eventually sell it.
If you own investment or business property that has declined in value, consider selling the property and donating the proceeds of the sale. You may be able to recognize a loss deduction on the sale in addition to a charitable contribution deduction for the donation of the cash proceeds. By contrast, if you donate the property, your deduction is limited to FMV, and you cannot claim a loss deduction.
If you are planning a large gift, contact your tax adviser to learn more about these and other alternatives for charitable giving.
Often, your income requirements and charitable giving desires can be satisfied with one comprehensive plan.
Recordkeeping Requirements
You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends upon the amount of your contributions and whether they are cash, property, or out of-pocket expenses. Note that a charitable organization generally must provide you with a written statement if it receives a payment from you that is more than $75 and is partly a contribution and partly for goods and services (for example, a fundraising dinner or entertainment).
If you make a contribution through cash, check, electronic funds transfer, debit card, credit card, or payroll deduction, you must maintain a bank record or written receipt, letter, or acknowledgment from the charitable organization. The record must show the name of the organization, the date of the contribution, and the amount of the contribution. For each cash contribution you make that is $250 or more, you must obtain a contemporaneous written acknowledgment from the charitable organization.
If you make a contribution of property, the records you must keep depend upon whether your deduction for the contribution is less than $250; at least $250 but not more than $500; over $500 but not more than $5,000; or more than $5,000. For all contributions of property, you must also keep additional written records that include, but are not limited to, a description of the property, the FMV of the property on the date of the contribution and how that value was determined, the basis of the property, and any terms or conditions attached to the contribution of the property.
In determining whether you made a contribution of $250 or more, do not aggregate separate contributions to the same organization. For example, if you donated $100 per month to a charity, your monthly payments do not have to be combined.
To determine whether your deduction is more than $500 (or more than $5,000), combine your claimed deductions for all similar items of property donated to any charitable organization during the year.
