Charitable Income Tax Deduction

Federal income tax law allows a deduction for gifts to qualified charitable organizations, such as churches, colleges, hospitals, charitable foundations, etc. The actual amount of the deduction is dependent upon several factors:

  • Type of charity: Does the organization benefit the general public or does it have a more limited or private purpose?
  • Type of asset: Is the donated item cash, a capital asset with untaxed appreciation, tangible personal property, etc.?
  • Portion of asset given: Is it a gift of the entire asset or only an interest in the asset, like a remainder interest, which will pass to the charity at some time in the future?
  • When gift is given: Is the gift being made now or will it occur at some future date, as under the terms of a will or trust?

Income Tax Savings

The gift of an asset to a charity generally results in a federal income tax deduction,1 which should decrease the tax due and increase net after-tax income for the year. However, charitable contributions are not always 100% deductible in the year they’re made.

Limits on Annual Charitable Deduction

Federal law limits the amount that is deductible for the year in which the gift is made, based upon one’s adjusted gross income (AGI). If the limit is exceeded for the year, any excess deduction can generally be carried forward for up to five years.

If combined charitable contributions for the year do not exceed 20.0% of adjusted gross income (AGI) for the year, they may all be deducted. However, if contributions exceed 20.0% of AGI, the deduction may be limited to 60.0%, 50.0%, 30.0%, or 20.0% of AGI, depending on the type of property given and the type of charitable organization receiving the gift. In no event can the deduction exceed 60.0% of the donor’s AGI for the year.

1 – The discussion here concerns federal income tax law; state or local income tax law may vary.

  • 60% limit: For 2018-2025, a 60.0% of AGI limit applies to cash contributions to public charities, i.e. most churches, hospitals, colleges, etc. Such charities are generally termed “50.0%” organizations.
  • 50.0% limit: A 50.0% of AGI limit generally applies to non-cash gifts to 50.0% public charities. If the gift is of capital gain property,1 and a deduction is taken for the fair market value of the property, a 30.0% of AGI limit applies. The 50.0% of AGI limit is available for gifts of capital gain property if the deduction is limited to the cost basis of the asset.
  • 30% limit: This limit applies to gifts “for the use” of any charitable organization and gifts (other than capital gain property) to non-50.0% type charities.
  • 20% limit: This limit applies to gifts of capital gain property to non-50.0% type charities.
  • Patents and Intellectual Property: A donor’s deduction for gifts of patents and other intellectual property is limited to the lesser of the taxpayer’s basis or the fair market value of the property. An additional deduction may be available for a limited number of future years if the donee organization realizes income from the gifted property and certain requirements are met.

Income Tax Deduction for Split-Interest Gifts

Determining the federal income tax deduction for a “split-interest” gift, i.e., a charitable remainder or charitable lead trust, can be complicated. The key factors involved are:

  • How long the charity must wait before it benefits; and
  • How much income is paid to the beneficiaries each year; and
  • The prevailing interest rates at the time of the gift (the IRC 7520 rate).

Seek Professional Guidance

The counsel and guidance of a CPA, IRS Enrolled Agent, or other qualified tax professional is strongly recommended.

1- Capital gain property as used here applies to capital assets held long-term (at least 12 months and 1 day).

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