Charitable giving is a hallmark of the American spirit. Every year, people give billions of dollars to charitable organizations that then put that money to work helping those in need. Whether you give cash, investment securities, or household items, charities use those resources to reach their goals.
The federal government encourages charitable giving by providing tax breaks for donations to qualified charities. However, there are generally limits on the amount you can deduct against your income on your tax return. Here's how much the IRS will share in your charitable giving.
The first hurdle: itemizing your deductions
You can generally only take tax deductions for charitable giving if you itemize your deductions. If the total of your charitable gifts and your other itemized deductions is less than the standard deduction, then you essentially don't really get any extra tax break for your giving.
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For the 2020 and 2021 tax years, there's an exception to this rule. Qualifying taxpayers can deduct up to a certain amount in charitable gifts without itemizing as long as the donations are made in cash rather than through gifts of property. The amount is $300 for taxpayers in 2020. For joint filers, the amount rises to $600 in 2021. However, these provisions are set to go away in 2022.
Income-based limits
Even if you itemize, there's only so much in charitable donations you're allowed to deduct on your tax return. The limits are based on a percentage of your income.
For gifts to most charitable organizations, you can deduct up to 50% of your adjusted gross income. That limit applies to all public charities, as well as private operating foundations and certain other private foundations that meet appropriate tests for making gifts to recognized charities. For private foundations that don't meet the tests above, a lower 30% AGI limit applies.
However, if you're giving appreciated stock or other property that's eligible for long-term capital gains treatment, then lower limits apply. For public charities and other favored entities, the 50% limit drops to 30%. For private foundations and others that usually have a 30% limit, a lower 20% limit applies to gifts of long-term gain property. The benefit, though, is that in many situations, you're allowed to deduct the full fair market value of those appreciated assets rather than merely what you paid for them.
There's a special higher limit for gifts of cash. You can typically deduct up to 60% of your AGI for cash gifts to charitable organizations, which for these purposes include supporting organizations and donor-advised funds in addition to full-blown public charities.
A special rule for cash gifts in 2020
Finally, there's a special rule that governs cash contributions in 2020. This rule wasn't extended into 2021, but some hope that it will eventually get the attention of lawmakers.
For the 2020 tax year only, if you made cash gifts to public charities other than supporting organizations or donor-advised funds, then you can deduct up to 100% of your adjusted gross income. In effect, taxpayers could zero out their income by making sufficiently large charitable gifts -- something that rarely occurs otherwise.
Let the IRS help you with your charitable giving
When you can claim a tax deduction for your gifts to charity, it's essentially like getting Uncle Sam to write part of the check to your favorite cause. Charities are counting on your donations, so make sure you get the biggest tax breaks you can.
