For those who are charitably inclined, the end of the year is an important time to check in with your tax preparer and confirm your charitable giving tax strategy. If you would like to learn more about the tax benefits of charitable giving, keep reading!
Most taxpayers can deduct some or all of the charitable gifts they make. At the highest level, the deductibility of charitable contributions depends on the type of property you would like to donate and the type of charity.
When determining the tax deductibility of a charitable donation, you must consider the following:
The type of charity:
- Qualified public charity,
- Private Charity: Any organization that is not a qualified public charity, including private non-operating foundations, veterans’ organizations, fraternal societies, and non-profit cemeteries.
The type of property:
- Capital gain property
- If the capital gain property is tangible personal property (i.e. collectible items, jewelry and gems, artwork, etc. as opposed to stocks and bonds) then the use to the charity will also impact deductibility rules.
- Ordinary income property.
Types of Charities
The IRS classifies all charities into two categories: 50% charities and non-50% charities. 50% charities are qualified public charities which represent the large charities you would typically think of — those operated exclusively for religious, charitable, scientific, literary or educational purposes, or the prevention of cruelty to animals or children, or the development of amateur sports. Non-50% charities would be any other type of charitable organization. It is fairly painless to look up whether your chosen organization is a qualified public charity using the IRS’s tool found at the link below:
The type of charity determines how much of your donation you can deduct as a percentage of your AGI. For example, if you have an AGI of $500,000 and would like to make a $400,000 cash donation, your deduction would generally be limited to 50% of your AGI ($250,000) for donations to a public charity (hence the term 50% charities) and only 30% of your AGI ($150,000) if you made the same donation to a non-public charity (a non-50% charity).
Type of Property
Cash contributions to public charities currently receive greater AGI limits than donations of capital gain property or ordinary income property. The deduction for cash contributions to qualified charities has been in flux in recent years. Historically the limit has been 50% of AGI, but was increased to 60% of AGI as part of the Tax Cuts and Jobs Act (TCJA) which will sunset in 2025. This limit was further increased to 100% for 2020 and 2021 only as part of Coronavirus stimulus. The 60% AGI limitation is back in effect for 2022.
- Cash contributions to Public Charities: limited to 60% of AGI until 2025 at which point it is currently set to revert to the historical 50% level.
- Cash contributions to non-Public Charities: limited to 30% of AGI
Capital Gain Property
- Public Charities: Fair Market Value (FMV) of the property not to exceed 30% of AGI OR elect to treat as ordinary income property (see below)
- Non-Public Charities: Basis in the property not to exceed 50% of AGI
Ordinary Income Property
- Public Charities: Lesser of Basis or FMV of the property not to exceed 50% of AGI
- Non-Public Charities: Lesser of Basis or FMV of the property not to exceed 30% of AGI
If you plan to donate tangible capital gain property (collectibles, cars, artwork, etc.) to a public charity then you must first determine whether the receiving charity will use the property in line with their stated focus, or whether the property is unrelated to the charity’s stated focus and/or they plan to sell the property within 3 years of receipt. If the property is related to the stated focus of the organization, then the capital gain property will be valued at its FMV. If the property is not related-use property, then the property must be valued at the donor’s basis. For non-public charities, the use of the property does not change the valuation method.
Other Helpful Info
Deductions can only be made for donations within the current calendar year. In the event that your contributions exceed the annual deduction limits, the excess contributions can be carried forward for up to 5 years. For example, if you made a large donation in 2020, you cannot choose to delay the deduction related to that donation to 2021. However, you may carry forward any amounts disallowed by the annual limitations to deduct in the following 5 years.
If the property you plan to donate has an aggregate value of over $5,000, then a qualified appraisal must be obtained and kept for your records. If the donated property has a value in excess of $500,000 then the appraisal must be attached to the tax return. In order to avoid audit, a Statement of Value may be obtained by the IRS for items with a value of over $50,000. The fee for this is $7,500 and is not deductible as part of the charitable contribution. Make sure you receive confirmation of receipt for any cash donations and for donations over $250, you receive written communication stating that you did not receive anything of value in return for your donation.
1. Donor Advised Funds
If you are charitably inclined, donating highly appreciated stock in kind through a Donor Advised Fund can be a very effective way to reduce your tax burden and meet your charitable objectives. Because capital gain property donated to public charities is eligible to be valued at FMV, when you donate highly appreciated stock you do not pay capital gains tax on the earnings and you are able to deduct the entire FMV of the stock up to the 30% of AGI limit. In this way, you save money on taxes and your favorite charity is able to receive more funds.
2. Know your Tax Bracket
Before making large charitable contributions, work with your tax preparer to make sure that you are only donating amounts that make sense for your given tax liability and tax sensitivity. For example, if you are in the 22% marginal tax bracket, you may want to make donations to sufficiently reduce your taxable income to fill the 12% bracket, but you may not care to make further donations only to decrease your marginal tax rate from 12% to 10%.
As always, if you have any questions related to this article or other charitable giving strategies, please don’t hesitate to reach out to our office.