Charitable contributions, also known as charitable donations, are gifts made to organizations. The IRS gives them tax-exempt status. These organizations are often called 501(c)(3) entities after the section in the Internal Revenue Code explaining which organizations are exempt from the federal income tax.
Exempt organizations include most public charities, such as educational institutions, religious organizations, hospitals, and other groups organized to benefit their communities. These organizations typically receive most of their funding and support from charitable gifts, grants, and contributions from the public.
U.S. tax law encourages charitable giving by offering a tax benefit to donors. Donors can take an income tax deduction for the year they donated. That means you can reduce the income the IRS taxes by the contribution amount. You can make contributions in cash or property. The taxpayer deducts the fair market value of the donated property.
Who Can Claim a Charitable Deduction?
Almost all individual taxpayers and businesses are eligible to claim a deduction for a charitable contribution. But claiming the deduction for a charitable gift only makes sense when they have enough other deductions to make itemizing worthwhile.
For most Americans, the standard deduction is larger than the total of the itemized deductions they can claim, so itemizing doesn't help. The filer's status determines the standard deduction. For 2023, it's $13,850 for individuals; for married couples filing jointly, it's $27,700; and for heads of household, it's $20,800.
During the COVID-19 pandemic, special rules went into place that allowed taxpayers who did not itemize to claim a deduction. They could deduct up to $300 in charitable contributions made during 2021. But 2021 was the only year that the benefit was available.
What Qualifies as a Charitable Contribution?
Generally speaking, a charitable contribution is anything that is valuable to a qualified charitable organization. This includes money or property in cash, clothing, household items, cars, real estate, securities, and other assets or services.
According to the IRS, donations to the following types of entities are tax-deductible as long as they don't benefit any specific person:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, and local governments, if your contribution is solely for a public purpose
- Nonprofit schools and hospitals
- Public parks and recreation facilities
- War veterans groups
- Expenses paid for a student living with you, sponsored by a qualified organization
- Out-of-pocket expenses when you volunteer for a qualified organization
- Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, and many other nonprofit organizations
Contributions to the following are not tax-deductible:
- Political groups or candidates running for public office
- Professional groups (such as lawyers, doctors, and civic leagues)
- Value of blood donations
- Cost of raffle, bingo, or lottery tickets
- Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
- For-profit hospitals and schools
- Value of your time or services
Tax Exempt Organization Search
The IRS offers a search tool that allows you to check whether an organization is eligible to get tax-deductible charitable contributions. You can also use this tool to get information on an organization's federal tax status and filing.
How Much Can You Deduct?
If you are making a cash gift to a qualified organization, it is easy to calculate the deduction amount. But things get more complicated when you donate other items of value. The IRS has definite rules about non-cash donations. These ensure that the donated property is worth the amount the taxpayer claims.
How Much of a Difference Will It Make?
A tax deduction only reduces the amount of your taxable income. You will not see a dollar-for-dollar tax savings. A $500 tax deduction will not put $500 more in your pocket. For example, if your adjusted gross income (AGI) was $50,000 in 2023 and you made a $1,000 donation during the year, your tax savings would be $220. That's because, for 2023, an individual is in the 22% tax bracket for any AGI above $44,750. So, the $1,000 you donated would be taxed at the 22% tax rate, saving you $220 in taxes.
Limits on Cash Deductions
You can donate your cash or property to charity as much as you wish. But there are limits on how much you can deduct for cash donations. The deduction limit is equal to 60% of a taxpayer's AGI. If you had $100,000 in AGI during the tax year and donated it to a qualified charity, your deduction would top out at $60,000. In other words, even if you donated your entire $100,000 to charity, you would still pay tax on $40,000 of that income despite not keeping any of it.
Things To Keep In Mind With Charitable Contributions
The following tips should help you decide about charitable contributions and help with questions the IRS may have.
One advantage of charitable donations of property or other assets that have gained in value since you bought them is that you will avoid paying taxes on the increased value. Donating appreciated assets instead of cash contributions allows the charity to get the appreciated asset's current market value. You may also avoid paying capital gains taxes of up to 15% or 20% on the appreciation.
Keep Records of Your Donation
Taxpayers often claim deductions that are larger than the actual value of their donations. So, the IRS may ask you to provide records proving your donation. For cash donations, it's best to donate using a check or credit card and keep the canceled check or credit card receipt. You should also get a written acknowledgment from the charity that lists anything you may have gotten in return for your donation.
If you donate property, you must keep copies of any qualified appraisals. Also, keep any written acknowledgment from the recipient.
Donations From IRAs
You must pay taxes on any distributions you take from a traditional IRA because you didn't pay tax on the money when it went into the account. But, a taxpayer older than 70 1/2 can make a qualified charitable distribution (QCD). This allows you to pass up to $100,000 from an IRA to a qualified charitable organization without paying tax on the distribution.
Tax advisors increasingly suggest that wealthy U.S. taxpayers make tax-advantaged gifts to charities they support from donor-advised funds (DAFs). These funds allow the taxpayer to place cash, property, or other assets into an investment account. Then, they can claim a tax benefit for the value of the assets donated. The fund will then pass along the donations of the taxpayer's choosing. For example, a taxpayer could invest $1 million into a DAF in the stock market. They could ask that the fund make $100,000 annual payments to the charity of their choice until the money runs out.
- You must itemize individual charitable contributions using Schedule A (Form 1040), Itemized Deductions. Include the schedule with your tax return.
- Clothing and household items must generally be in good used condition or better.
- The amount of your donation can drop by how much you benefit. For example, if you pay $250 for a $50 ticket to a charity ball, only $200 is tax-deductible, whether you attend the event or not.
- To claim a deduction for cash, check, or monetary gifts, you must keep a bank record or payroll deduction record. You can also keep a written communication from the charity organization that includes the date and amount of the contribution. For contributions totaling $250 or more, you must also include a description of any property contributed and whether any goods or services were given in exchange for the gift.
- You might need more forms to claim a contribution deduction over a certain amount. For example, Form 8283 for non-cash contributions over $500 and Section B of Form 8283 for donations valued at over $5,000.
More Questions? Contact an Attorney
Charitable contributions are an excellent way to reduce your tax bill while helping others. Talk to a local tax attorney to learn more about how you can use the charitable contribution tax deduction. An attorney will be familiar with the tax code, can help with any necessary filing, and ensure that you follow federal and state laws.
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