by Trent Krassow, ARe, ARM, CMA, EA, MBA
We routinely get questions about how charitable contributions effect a tax return. As with most things in the tax world, the answer is usually, “It depends.” So, standard disclaimer here: your situation is your situation, and may not be the same as that other guy’s situation, so if you or that other guy are unsure how a donation or other decision may impact each of your taxes, give us a call and we’ll work through the variables with you. This article is meant to provide some general guidelines and tips, not specific tax advice.
In our practice, we tend to see a few broad categories of questions, so we’ll address those here:
When is a gift deductible, and when is it not?
How much is deductible?
Can I give stuff, or just money?
What rules do I need to follow?
When is a gift deductible, when is it not?
To be deductible a gift needs to be made to a qualified organization. The IRS provides some technical definitions of what constitutes a qualified organization, which you can read about here if that is of interest to you. Otherwise, think in terms of the non-profit organizations we are all familiar with: the soup kitchen, your house of worship, many educational organizations, etc. The IRS also provides a web search tool to validate qualified organizations here.
In other words, your private gifts to an individual in need are not deductible, but your gifts to the organizations that help serve those people probably are. However, please do not let that stop you from helping out where you have the ability — perhaps somebody close to you needs your help, and you have the ability to help — by all means, help!
How much can I deduct?
You are generally “limited” to 60% of your Adjusted Gross Income, or AGI (not your total income, not your taxable income). Prior to 2018, this was limited to 50%. For example, suppose yours is an “average” American household earning $59,000. For simplicity, we’ll assume this is your AGI. The maximum deduction you could get in 2018 for your charitable contributions would be 60% of that number ($59,000 x 60% = $35,400). However, you must itemize your deductions to get any tax benefit from giving.
If you donate appreciated property (such as stocks), your deduction will generally be limited to 30% of your AGI.
Neither of these limitations mean that you can’t give more than the limit, just that you only get a deduction up to the limit. Not too many people end up constrained by these limits.
Can I give stuff and money? What about my time?
You can give anything that will be of value to that organization, but you can only deduct gifts of money and stuff. Thus, if you volunteer for an organization (and you should!), your time is not deductible, even if you are a professional performing services for that organization and for which you generally charge hourly. Thus, if you are teacher or an artist and volunteer your skills for your favorite non-profit, the value of your time is not deductible. If you donate property (including “stuff”), make sure you and the organization establish an appropriate value for those items donated.
What rules do I need to follow?
Rules for being nice? It’s the IRS, so of course there are rules! Here are the big ones:
Make sure you are giving to a qualified organization (generally a registered 501( c )(3) or private foundation – additional rules apply for certain private foundation gifts).
Get a written receipt from the charity. Make sure it includes the date, the amount, and that “no goods or services were provided in exchange for this gift”. In other words, make sure it is a gift, not a sale.
If multiple gifts are given to the same charity, a year-end statement from the organization will work.
If your gifts are over $250 for the year, you must have this documentation to take the deduction!
The donation must be completed (as in, the stuff or money must actually change hands) prior to the end of your tax year.
Non-cash (stuff) donations of $5000 or more require a qualified appraisal.
Be careful when deducting the donation of a car! It is only deductible to the extent that the organization actually realizes value. Thus, if you donate a car and the charity sells it for money, your deduction is limited to what the charity receives for it.
These are general rules, but if you are considering a large gift to your favorite charity, or otherwise want to know how your gifts will specifically impact your taxes, please give us a call. We encourage generosity regardless of the tax impact!
If you’re looking for a worthy organization to donate to, our business proudly supports Partners Mentoring Youth, a local non-profit providing mentoring services to at-risk kids and bettering our communities.
photo by rawpixel on Unsplash