Charitable Contributions: Your Guide to Tax Deductible Donations

Maximize Your Tax Deductions with Strategic Charitable Giving.

When it comes to your tax strategy, every dollar counts.

That’s why it’s crucial to ensure 

1. You are giving to causes that align with your core values, and
2. Each charitable contribution you make is eligible for a tax deduction (unless you .

To make the most of your giving, here’s what you need to know:

Itemized Deductions

Normally, your donations to qualified organizations are only tax deductible if you itemize deductions on your tax return.

What does “itemize” mean?

When you choose to deduct specific items (real estate tax, mortgage interest, charitable contributions, etc.) against your taxable income, you itemize your deductions.

Itemized deductions are reported on Schedule A of Form 1040.

The alternative to itemizing deductions is taking the standard deduction.

The standard deduction is a fixed amount that reduces each taxpayer’s taxable income. Every year, the IRS updates the standard deduction to adjust for inflation and any new tax laws.

You cannot take the standard deduction and itemize your deductions. You must choose one or the other.

To itemize, the sum of your Schedule A deductions should exceed the standard deduction.

For 2021, the standard deduction is $12,550 (single) or $25,100 (married filing jointly).

Note: If you take the standard deduction in 2021, you can still claim a deduction of up to $300 for cash contributions made to qualifying charities. The maximum deduction is increased to $600 for married individuals filing joint returns. This is a temporary provision enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Carryovers

The carryover rules for excess contributions are generous.

If your contributions are subject to more than one of the AGI limits, you include all or part of each contribution in a certain order, carrying over any excess to a subsequent year (if allowed).

Except for qualified conservation contributions, you may be able to deduct the excess in each of the next 5 years until it is used up, but not beyond that time.

Giving to Churches and Religious Organizations

You are normally allowed to claim a charitable deduction for tithes, offerings and donations to a Church.

Church’s are qualified organizations so long as they have the following characteristics:

• Distinct legal existence
• Recognized creed and form of worship
• Definite and distinct ecclesiastical government
• Formal code of doctrine and discipline
• Distinct religious history
• Membership not associated with any other church or denomination
• Organization of ordained ministers
• Ordained ministers selected after completing prescribed courses of study
• Literature of its own
• Established places of worship
• Regular congregations
• Regular religious services
• Sunday schools for the religious instruction of the young
• Schools for the preparation of its members

The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether an organization is considered a church for federal tax purposes.

For tax deduction limitations, see Giving to Public Charities.

Giving Cash to Public Charities

Normally, your deduction for cash contributions to public charities is limited to 60% of your adjusted gross income.

Under the CARES Act, however, your deduction for cash contributions made in 2021 is limited to 100% of your adjusted gross income.

What is adjusted gross income

Your Adjusted Gross Income (AGI) is the sum of your earned income, passive income, business and investment income, and a few other items.

Your AGI is used to determine how much of your income is taxable before taking itemized deductions and other deductions.

Let’s say a single adult has earned income and business income that add up to an  AGI of $100,000. If he meets the threshold to itemize his deductions, he should be able to itemize a maximum of $60,000 (60%) of charitable deductions to a qualified organization.

What is a qualified organization?

My Brother’s Keeper, Boys and Girls Club, and most churches are qualified organizations.

You may deduct a charitable contribution made to, or for the use of, organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code.

You can search for a qualified organization via the IRS Tax Exemption Organizations Search.

It is important to note that your gifts are only deductible if you do not receive anything from the qualified organization in return. If you receive a benefit as a result of making a contribution to a qualified organization, you can only deduct  the amount of your contribution that is more than the value of the benefit you receive.

IRS Publication 526 provides the following example:

You pay $65 for a ticket to a dinner dance at a church. Your entire $65 payment goes to the church. The ticket to the dinner dance has a fair market value of $25. When you buy your ticket, you know its value is less than your payment. To figure the amount of your charitable contribution, subtract the value of the benefit you receive ($25) from your total payment ($65). You can deduct $40 as a charitable contribution to the church.

Giving Noncash Contributions to Public Charities

Although most cash contributions to qualified organizations are deductible, noncash contributions have restrictions.

For instance, you cannot deduct the value of accounting services, legal services, or other professional services you donate to a qualified organization.

You can, however,  deduct expenses incurred to serve a qualified organization. The expenses must be:

• Unreimbursed;
• Directly connected with the services;
• Expenses you had only because of the services you gave; and
• Not personal, living, or family expenses.

If you give property to a qualified organization, such as appreciated stock or cryptocurrency, you generally can deduct the fair market value (FMV) of the property at the time of the contribution.

Noncash contributions to public charities are limited to 50%, 30% or 20% of your adjusted gross income, with adjustments, depending on the purpose and type of contribution.

Giving to Private Foundations

Private Foundations are different from public charities.

As the name implies, private foundations do not have to solicit funds from the general public. Most private foundations primarily focus on making grants rather than operating charitable programs.

Note: Private Operating Foundations (POFs) normally operate charitable programs. Donations to these organizations are subject to the same limitations as public charities.

Your deduction for cash donations to a private foundation is generally limited to 30% of your AGI. 

Noncash contributions to private foundations, on the other hand, have a deduction that is limited to 20% of your AGI, with adjustments.

To determine whether an organization is a public charity or a private foundation, search for the organization on the IRS Tax Exempt Organization Search.

Organizations with Deductibility Code PC are public charities.

PF is the Deductibility Code for Private Foundations.

Giving to Businesses and Non-qualified Organizations

You cannot deduct contributions to an LLC, S-Corporation, C-Corporation, or any other type of business.

So, if you are looking to donate to the Zuckerberg’s charitable LLC or any other charitable-inclined LLC, be warned that your donation will not qualify for a tax deduction.

Similarly, contributions to non-qualified tax-exempt organizations should not be itemized on your tax return. These types of non-qualified tax-exempt organizations include:

1. Certain state bar associations
2. Chambers of commerce and other business leagues or organizations.
3. Civic leagues and associations.
4. Country clubs and other social clubs.
5. Foreign organizations other than certain Canadian, Israeli, or Mexican charitable organizations.
6. Homeowners’ associations.
7. Labor unions.
8. Political organizations and candidates

Giving to Political Organizations

Many political organizations are non-qualified tax-exempt organizations.

This means that most donations to political organizations are not tax-deductible.

PAC Funds, political parties, candidate campaigns and other political organizations are not qualified organizations eligible for tax-deductible donations.

Some political organizations, however, have a separate public charity to which donations are tax-deductible.

The NAACP Political Action Committee, for example, is not eligible for tax-deductible donations. On the other hand, the NAACP Legal Defense and Educational Fund is organized under IRC 501(c)(3) and carries out the charitable and educational activities of the NAACP.

The Fund is legally allowed to accept tax deductible contributions.

Giving to a Donor-Advised Fund

A different type of fund, a donor-advised fund (DAF), is a key philanthropic and tax planning tool.

Although the fund itself is not a public charity, the entities that maintain the funds (e.g. Fidelity Charitable, Schwab Charitable) are organized under IRC 501(c)(3). As a result, donations into a donor-advised fund often have favorable tax deduction limits.

Cash, stocks, real estate and cryptocurrency are examples of assets that can be donated into a donor-advised fund for an immediate charitable tax deduction.

The tax deduction is limited to 60% of your AGI.

For taxpayers, one of the most attractive features of the DAF is, even though the charitable tax deduction is immediate, the donated assets can be distributed to the intended charity at a later date.

This feature makes DAFs popular year-end planning tools.

DAFs allow taxpayers to qualify for a “last minute” tax deduction while taking their time to choose which charity will receive their philanthropic dollars.

There are, however, circumstances in which you cannot deduct your contribution to a donor-advised fund. Some of those circumstances include:

• The qualified organization that sponsors the fund is a war veterans’ organization, a fraternal society, or a nonprofit cemetery company; or
• You don’t have an acknowledgment from that sponsoring organization that it has exclusive legal control over the assets contributed.

It is important to note that donor-advised funds have become increasingly popular over the past several years due to changes in the tax law. The IRS has issued requirements and proposed regulations in efforts to minimize the use of donor-advised funds for tax loopholes.

Giving to a Trust

Giving to a trust is complicated.

While most gifts to a trust are not deductible on an income tax return, wealthy people often move assets into certain types of trusts to reduce or eliminate their estate tax.

There are charitable trusts, such as charitable remainder trusts and charitable lead trusts, that allow taxpayers to move assets out of their estate and split the trust assets between a charity and another beneficiary.

Donations to the charitable trust are normally tax deductible. The deduction is determined by life expectancy, future asset value and other factors.

One alternative to a charitable trust is the Charitable Gift Annuity (CGA).

With a CGA, you transfer assets to a charity.

With this transfer, you enter into an unsecured contract with the charity that requires fixed payments to the donor over a specified number of years.

This giving vehicle allows you to receive cash flow while also receiving a tax deduction for the charitable portion of the gift.

To set up a trust or donate assets into a trust, you should consult with an estate planning attorney to ensure all legal compliance requirements are met.

Giving to Individuals

Gifts to your children, your best friend, your Uncle, your co-worker’s new baby or any other individual are usually not tax deductible.

In case you missed the key point made throughout this blog, gifts are only deductible when made to qualified organizations.

While this may seem straightforward, there are instances where the gift recipient might be unclear.

For example, let’s say your niece set up a Go Fund Me account to raise money for lodging during an international trip with her Gospel Choir.

Any funds donated to this fundraiser are not tax deductible because the end recipient of the gift is your niece, an individual.

Or, let’s say your cousin needs $5,000 for college tuition. You decide to pay the tuition directly to the college. While the college is a qualified organization, the payment is made on behalf of an individual, and is thus not tax deductible.

Charitable contributions set aside for use by a specific person are not deductible.

Gift Tax

It is also important to note that, if you gave gifts to an individual in 2021 totaling more than $15,000 (other than to your spouse), you might have to file Form 709,  United States Gift (and Generation-Skipping Transfer) Tax Return.

Form 709 tracks your “taxable” gifts over your lifetime.

Why does the IRS want to track your gifts?

You probably already know why. It’s because total gifts over a certain threshold (you guessed it), are taxable.

That “threshold” is known as the basic exclusion.

Every taxable gift reduces your basic exclusion from estate tax. 

Under current tax law, most of us will never have to worry about the estate tax as the basic exclusion for 2021 is $12,060,000 ($24,120,000 for married couples).

Keep in mind, the basic exclusion is annually adjusted for inflation and any change in tax law. Prior to President Trump, the basic exclusion for individuals was only $5,490,000. 

The current basic exclusion amount is set to expire in 2025.

Gifts from Your IRA

For taxpayers over age 70 1/2, giving directly from your IRA lowers your taxable income and provides you with a charitable tax deduction. 

A qualified charitable distribution (QCD) is a distribution made directly by the trustee of your individual retirement arrangement (IRA), other than a SEP or SIMPLE IRA, to certain qualified organizations.

Your total QCDs for the year can’t be more than $100,000. 

Documentation

As with all tax documents, it is important to keep record of all charitable contributions. 

If the donation’s value is at least $250, you must have a written statement from the qualified organization acknowledging your donation. The statement must contain the information and meet the tests for an acknowledgment.

Proper documentation will not only justify your tax deduction with the IRS and state agencies, it will also help your tax preparer complete all necessary forms.

For example, if your tax deduction for noncash contributions is over $500, your tax preparer will need documentation to complete an additional form, Form 8283, and attach it to your Form 1040.

Conclusion

Giving is not only one of the best ways to make a positive impact, it is also one of the best ways to reduce your income tax liability.

Although giving money away takes money out of your pocket, at least you get to control where the money is directed, unlike your tax dollars.

For more information on tax-deductible contributions, see IRS Publication 526.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.