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 may decrease the tax due and increase net after-tax income for the year. However, charitable contributions are not always 100% deductible against an individual’s federal income tax liability.

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 total charitable contributions for the year do not exceed 20% of AGI, they may all be deducted. However, if total contributions exceed 20% of AGI, the allowable deduction may be limited to 60%, 50%, 30%, or 20% of AGI, depending on the type of property given and the type of charitable organization receiving the gift.

1 – The discussion here concerns federal income tax law. For individual taxpayers, the deduction for charitable gifts is one of a number of itemized deductions listed on Schedule A, Form 1040. In calculating taxable income, a taxpayer may choose to deduct from adjusted gross income (AGI) either the standard deduction or the total allowable deductions from Schedule A. State or local income tax law may vary.

  • 50.0% limit: This limit generally applies to charitable gifts to organizations such as churches, hospitals, colleges, or the federal government or state and local governments. For 2018-2025, a 60% of AGI limit applies to cash contributions. The 50% limit is available for gifts of capital gain¹ property if the deduction is limited to the cost basis of the asset. A 30% limit applies to gifts of capital gain property for which the basis is the current fair market value.
  • 30% limit: This limit applies to contributions to charitable organizations such as fraternal societies, veterans’ organizations, non-profit cemeteries, and certain non· operating foundations. This limit also applies to gifts “for the use of” (instead of gifts “to”) any qualified charity.
  • 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.

Charitable Provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

 
Initially applicable to 2020 only, the CARES Act provided two expanded deductions for cash gifts to charity by individuals. These two deductions were later extended to 2021 by the Consolidated Appropriations Act, 2021.
 
  • Non-itemizers: In 2020, for taxpayers who did not itemize deductions (i.e., used the Standard Deduction), a limited deduction · $300 ($150 MFS) – was available as an “above-the-line” adjustment, reducing adjusted gross income (AGI). For charitable gifts by non-itemizers in 2021, the allowable deduction increased to $600 (MFJ) • $300 for all other taxpayers, and is taken as a “below-the-line” deduction to reduce taxable income.
  • Schedule A itemizers: For both 2020 and 2021, an expanded deduction (generally, up to 100% of AGI) is available for charitable cash gifts for those who itemize deductions on Schedule A. A deduction for such contributions is generally allowed up to the amount by which a taxpayer’s AGI exceeds the deduction for other charitable deductions.

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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