Are You Maximizing the Tax Benefit of Your Charitable Gifts?

Americans are generous people: In 2021, they gave more than $484 billion to charities. And that was despite changes in 2018 that elimi­nated chari­table deduc­tions for many taxpayers.¹ While most chari­table giving is still tax deductible when itemizing, you need to know the rules.

COVID-era deduction rules have expired. Taxpayers can no longer deduct $600 of cash contri­bu­tions without itemizing. The ability to claim chari­table deduc­tions up to 100% of adjusted gross income (AGI) is also gone.

Receiving a tax reduction through chari­table giving begins with having total itemized deduc­tions greater than the standard deduction.

Filing Status	Standard Deduction 2023
Single; Married Filing Separately	$13,850
Married Filing Jointly & Surviving Spouses	$27,700
Head of Household	$20,800

The amount of chari­table giving and other itemized deduc­tions must exceed the standard deduction to reduce taxable income. Other itemized deduc­tions can include:

• Medical and dental expenses
• Mortgage loan points and interest
• Investment interest
• Unreim­bursed employee expenses
• Business expenses, including some for travel
• Casualty, disaster, and theft losses
• Certain state and local taxes, including sales taxes and property taxes

You will need to document your chari­table giving. When making cash gifts of less than $250, you can use a canceled check, credit card statement, or a simple receipt from the charity. Cash gifts of more than $250 require a charity note showing the amount donated, date, and donor’s name. The note must also state that “No goods or services were provided in exchange for these gifts.” If you did receive something, the note should say what it was and the value of the goods or services.

Non-cash gifts may require documen­tation depending on the value of the donation.²

• Less than $250: A receipt from the organi­zation showing the donated property’s name, date, location, and description.
• $250–$500: A receipt with the same infor­mation as above, plus a note stating, “No goods or services were provided in exchange for these gifts.” You need to keep reliable records of the gift, charity, date, fair market value, and cost basis.
• $500–$5,000: All the above infor­mation is required, plus Form 8283.³ Gifts of a car, plane, or boat also need Form 1098‑C, which the charity provides.
• Over $5,000: All the above plus an appraisal summary to be attached to your tax return. Gifts of artwork worth more than $20,000 require the entire qualified appraisal, which must be included with your tax return. One exception to the appraisal requirement is when you are giving publicly traded securities, and the market value is readily available.

Documenting your gift is only the first step.⁴ There are also strict rules for valuing the gift. Cash gifts require no valuation—you can simply deduct the total amount of your cash gift, up to 60% of your AGI in any one tax year. Excess deduc­tions can be carried over to the next tax year. You can deduct the excess in each of the next five years, but it must be used up within that time. Keep in mind, your total deduction for cash gifts cannot exceed 60% of your AGI, which includes current year gifts as well as any excess from previous years.

Valuing gifts of property is much more compli­cated.⁵ Depending on the type of gift, there are two valuation options: fair market value and cost basis. Gifts of property that are considered “ordinary income” must use a cost basis for their value. Cost basis means what you paid for the property, minus any depre­ci­ation taken earlier on your tax return. Ordinary income gifts are those that were held less than 12 months, inventory, or something you created (referred to as “creative works by donor”).

When giving property that you have held longer than 12 months, use fair market value for the deduction unless:

• You are giving property (besides qualified stock) to a private foundation.
• You choose to take a special election, in which case cost basis is used.
• The charity immedi­ately sells your donated property. This is called “unrelated use,” and fair-market value cannot be used in this case.

You can deduct the total fair market value of appre­ciated property (capped at 20% to 50% of your AGI) in any tax year. The percentage depends on the property type and the recipient organi­za­tion’s tax status.

• Public charities and operating founda­tions are capped at 50% of AGI.
• Non-operating founda­tions and some other entities are capped at 30% of AGI.
• Other qualified organi­za­tions are capped at 20% of AGI.⁶

The most signif­icant tax advantage comes from giving appre­ciated property when you can deduct fair-market value and avoid paying capital gains tax. Publicly traded securities are one of the easiest items to value. If the security is sent by regular mail, use the security value on the date of mailing. If you deliver the security through a broker acting as your agent, the valuation is deter­mined by the date the security is trans­ferred to the organization.

The IRS has special rules for valuing specific types of property:

• Clothing or household items: Deduc­tions for used items are allowed only if they are in good (or better) condition. You must have a qualified appraisal when giving items valued at greater than $500, and thrift-shop fair-market value can be used for gifts worth less than $500.
• Car, boat, or airplane: You may only deduct the amount the charity receives for the item in a sale. If the charity uses the item or gives it to a needy person, it must certify the value on Form 1098‑C.
• Taxidermy: Only the cost of mounting the animal may be deducted.

With increased standard deduc­tions, fewer taxpayers will itemize their taxes. Instead, they will take the standard deduction—which means they will not be able to deduct chari­table contributions.

Combining multiple years of annual chari­table contri­bu­tions into a single year may allow you to itemize. Using a donor-advised fund is an excellent way to combine multiple years of chari­table giving by funding it with appre­ciated securities.

IRA owners older than 70 ½ can make chari­table gifts from their retirement accounts through Qualified Chari­table Distri­b­u­tions. These donations are not deductible on a tax return, but they do offer a tax benefit by using pre-tax dollars.

The IRS is not trying to discourage chari­table giving. It is tight­ening require­ments to limit abuses. Gifts of money or property you want to claim as a tax deduction must go to a recog­nized and qualified charity or non-profit entity. The IRS maintains infor­mation on its website and in Publi­cation 526.

Follow the rules, and you won’t have any problems. Keep giving.

Insights:

• Standard deduc­tions increased signif­i­cantly in 2018.
• Non-cash gifts may require documen­tation depending on the value of the donation.
• Cash gifts are capped at 60% of AGI in any tax year.

Origi­nally Posted: July 31, 2012