By Susan Thomas, CST Senior Manager
‘Tis the Season for charitable donations. Charitable donations are an important income tax deduction for taxpayers that itemize. Deductible contributions include money or property given to qualified charitable organizations. Examples of qualified organizations include:
- Religious Organizations
- Public Charities
- Salvation Army
- United Way
If you are unsure whether the organization you want to contribute to is “qualified”, the IRS maintains a list on their website. To learn more, click here.
Contributions to foreign organizations may be deductible. Generally these organizations are not foreign, but conduct activities in foreign countries. Check the IRS website for deductibility.
There are limitations to the amount of contributions taxpayers can deduct. In general, contributions of cash may be deducted up to sixty percent of adjusted gross income. Contributions that exceed this limit can be carried forward five years. Other limitations apply based on the type of property being donated and the organization. For example, cash donations to private non-operating foundations are subject to a thirty percent limitation.
Taxpayers can also donate stock and receive a deduction for the fair market value of the stock on the date donated. This deduction is limited to either thirty or fifty percent of adjusted gross income depending on whether the stock has been held long-term or short-term. Taxpayers receive a charitable contribution deduction and avoid reporting any gain they would have to recognize, had they sold the stock. Alternatively, the taxpayer should sell stocks that have fallen in value and report the loss and donate the cash.
Non-cash donations, such as clothing and household items, are deductible only if the items are in good used condition or better. If the contribution is valued over $5,000, the taxpayer must get an appraisal of the donated property. Some organizations, such as Goodwill, have valuation guides online that you can use to value the items donated. These donations are subject to fifty percent of adjusted gross income limitation.
Donor Advised Funds
Donor-advised funds are a tax-efficient way to contribute to favorite charities. A taxpayer can contribute cash or securities to a donor-advised fund and take an immediate tax deduction. Those funds can then be invested and grow tax free, making more money for charities. The taxpayer can direct what charities they want the funds distributed to now and/or over time.
Keep in mind that contributions over $250 will need a written statement from the organization showing the amount contributed and whether the organization did or did not give any goods or services in return for the taxpayer’s contribution. Taxpayers must have this statement by the date they file their tax return. Do not combine separate donations to a single organization. This applies only to single contributions over $250.
Taxpayers may also be able to “bunch” their charitable donations. When the Tax Cuts and Jobs Act was passed, the standard deduction rose making it harder for taxpayers to itemize. By “bunching” charitable contributions into one year, a taxpayer may be able to itemize in that year. For the following year, a taxpayer would not make a charitable donation and go back to the standard deduction.
Please keep these rules in mind when making charitable donations. Contact your CST advisor if you have any questions or call 703.391.2000 for more information.