Charitable giving allows individuals and businesses to support their communities while benefiting from valuable tax deductions. However, maximizing these deductions requires understanding eligibility, limitations, and documentation requirements. To qualify, donations must be made to IRS-recognized tax-exempt organizations, such as religious institutions, educational groups, public charities, or certain veterans’ organizations. Contributions to individuals or unqualified entities are not deductible. Whether donating cash, property, or food inventory, knowing the rules can help optimize tax savings while making a meaningful impact.
Determining the Value of Contributions
The IRS has clear guidelines on how to determine the deductible value of donations, which vary based on the type of contribution:
- Cash donations: Deductible at their full amount, up to the AGI limit.
- Property donations: Deductible at fair market value, with potential adjustments for appreciated assets.
- Stocks and securities: If held for more than a year, generally deductible at their full fair market value, potentially avoiding capital gains taxes.
- Vehicles: Subject to specific rules based on how the receiving charity utilizes the vehicle.
Although the deduction for non-cash contributions is generally based on the fair market value of the donated property, if the asset has appreciated in value, specific adjustments may be required to determine the deductible amount. For large or complex donations, independent appraisals may be necessary to verify the donation’s value.
Recordkeeping and Documentation Requirements
Proper documentation is crucial for claiming charitable deductions. The IRS requires taxpayers to keep records, including receipts and acknowledgment letters, specifying the donation amount and recipient. For contributions over $250, a written acknowledgment from the nonprofit must confirm whether goods or services were received and, if so, provide a good faith estimate of their value. It should also include the organization’s name, cash donation amount, a description (but not value) of non-cash contributions, and a statement if any benefits were solely intangible religious benefits.
When filing taxes, individuals must report deductions on Schedule A of Form 1040, while businesses claim deductions on their applicable corporate tax forms.
Limitations on Charitable Deductions
Charitable contributions are generally deductible up to 50% of adjusted gross income (AGI), excluding net operating loss carrybacks. Donations to specific private foundations, veterans organizations, fraternal societies, and cemetery groups are capped at 30% of AGI.
The 50% limit applies to public charities, private operating foundations, certain private foundations that distribute donations within 2.5 months, and private foundations pooling contributions for public charities.
The 30% limit applies to other private foundations and organizations under section 170(c) that don’t qualify for the 50% limit, such as domestic fraternal societies.
Special rules apply to gifts of long-term capital gain property.
Timing of contributions
Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.
Contributions to Foreign Organizations
In most cases, donations to foreign charities are not tax-deductible, unless the recipient organization is explicitly recognized by the IRS due to a tax treaty agreement. For instance, specific Canadian charities qualify for deductions under certain conditions, provided the donor has taxable income from Canadian sources. Before contributing to international organizations, donors should verify the entity’s tax-exempt status to ensure eligibility.
Taxpayers who take a strategic approach to charitable giving can maximize tax savings while making a meaningful impact on causes they support. By understanding deduction limits, keeping detailed records, and choosing the right donation methods, individuals and businesses can optimize their philanthropic efforts while benefiting from valuable tax advantages. Contact your Stephano Slack tax manager or partner at 610-687-1600 or email [email protected].
Author Robert Radzinski, CPA, Manager, manages tax compliance for businesses and high net worth individuals. Rob can be contacted at 610-687-1600 or [email protected].
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