Your charity donation tax deduction guide

Like many people, you may have a desire to use your money in a way that can make a difference to your community or for the causes you care about. Developing a charitable giving strategy can help you achieve the meaningful impact you envision while taking advantage of tax benefits along the way.

In order to make the most of your tax deductions, it’s worth reviewing what type of deductions qualify, how much you can deduct and how to find the charitable giving strategy that aligns with your values and your financial goals. 

How do tax deductions work?

A tax deduction is a provision that reduces your taxable income, generally lowering the amount of taxes you have to pay. You can claim deductions in two main ways:

• Standardized deduction: A single, fixed amount you can deduct from your income, regardless of expenses.
• Itemized deductions: If you have significant deductible expenses such as state and local taxes paid, mortgage interest and charitable donations, you can itemize your deductions by listing each qualifying expense on Schedule A of your tax return.

Are charity donations tax deductible?

Yes, most charitable donations are tax deductible. This means that if you’ve donated to charities in a given year, you can most likely list them as itemized deductions on your taxes. However, there are a few IRS rules to follow to ensure you are claiming donations properly, so it’s important to consult with a tax professional when developing your charitable giving strategy.

How do charity tax deductions work?

The IRS has certain requirements for claiming charitable donations on your taxes. Before you claim any charitable giving on your tax forms, make sure you do the following:

• Donate to a qualified charity. The IRS has specific requirements for organizations to be considered tax-exempt. For example, gifts made to individuals are not considered eligible. Review this IRS list of types of qualified organizations.
• Consider any potential benefit received. If you receive any goods or services in exchange for your donation – such as admission to a charity banquet or tickets to a sporting event – there are limits to how much you can deduct. The IRS only allows you to deduct the amount that exceeds the fair market value of the benefit you received.
• Keep detailed records. You should keep receipts or documentation of your donations for at least three years. Most charities will provide a year-end giving statement that outlines what you donated throughout the tax year. The documentation should also make clear whether the organization you donated to provided any goods or services in exchange for your donation.
• Itemize your deductions. The IRS only allows people to deduct charitable donations if they are itemized using Schedule A of Form 1040.  

How much can you donate to charity for taxes?

Typically, the amount you can deduct for charitable cash contributions is limited to 60% of your adjusted gross income (AGI).

The deduction limit for charitable contributions applies to your total donations for the year, regardless of how many organizations you support. If your donations exceed the limit, you can often carry over the excess amount to your tax returns for the next five years.

In some cases, you may be limited to a lower percentage than 60%, depending on different types of donations or organizations. Some examples of those exceptions are listed in the following section.

Understanding your charitable tax deduction options

Some giving approaches are simple, while others are a bit more complex – and each comes with different tax implications. When deciding which type of donation to make, consider these options. 

Direct gifts of cash

Direct gifts of cash can be made by check, credit card or even payroll deduction through your employer. As mentioned above, gifts of cash to qualified public charities can be deducted in an amount up to 60% of your adjusted gross income (AGI) in a given year. But if donations are made to private foundations (such as a family foundation), the annual limit is 30% of your AGI.

Small donation amounts each year might not create enough of a deduction to give you a tax break under the current tax law. If you plan to donate the same amount of money each year, consider “bunching” donations into a single year so you can itemize and claim the deductions.  

Gifting appreciated assets

If you hold publicly traded securities (stocks) or other types of assets that have appreciated in value, you may face a significant capital gains tax when you sell the asset. Because of this, some people choose to gift the appreciated asset to a qualified charity. This allows you to avoid paying the capital gains taxes you’d likely need to pay if you sold the asset for a profit.

For gifts of appreciated publicly traded securities, you can claim a tax deduction equal to the fair market value of the asset. The tax deduction cannot exceed 30% of your AGI for gifts to a public charity or 20% of your AGI for gifts to a private foundation. 

Gifting other types of assets

Other assets that can be gifted include real estate, life insurance policies, and capital assets such as land, buildings, machinery and appreciated closely held securities that you’ve owned for at least one year.

As mentioned above, if your gifts exceed the tax deduction limits in the year the gift is made, you can carry the unused portion of the deduction forward up to five years. You can claim the unused deductions to the extent they fall within your deduction limits for each of those years until the entire amount has been exhausted.

Charitable lead trust

This type of irrevocable trust is designed as a wealth planning technique to transfer assets to family with a discounted value, or to reduce taxes on the grantor’s estate after their death. The trust first pays income to a charity (based on a rate determined by the IRS) for a set number of years. When the term ends, the remaining value of the assets is directed to designated non-charitable beneficiaries.

Charitable remainder trust

A charitable remainder trust can support your favorite cause and provide financial benefits for you or your family at the same time. This type of irrevocable trust allows you to make a charitable gift but retain a taxable income stream (determined by the IRS) generated by those assets for a set number of years or for life.

When the term ends, remaining assets are passed on to the designated charities tax-free. A portion of the contribution to the trust is tax deductible.

Qualified charitable distribution (QCD)

When you are 70½ or over, you can donate up to $105,000 (adjusted yearly for inflation) from your traditional or Roth IRA directly to a qualified charitable organization. If you are subject to required minimum distribution (RMD) rules (applicable after you reach age 73), a direct transfer from your IRA allows you to avoid having to pay income tax on the RMD and gives the assets directly to the charity.

Private foundation

An individual or family can establish a non-profit entity that is designed to direct donations or gifts to other charitable organizations. The foundation directors retain control over how donations are invested and when and how the gifts are ultimately directed.

There are limits on claiming tax deductions (see rules for private charities in the chart below) and at least 5% of the foundation’s assets must be distributed to qualifying charities each year. The foundation must comply with several administrative requirements, including filing an annual tax return.

Donor-advised fund

A less complex option than a private foundation is a donor-advised fund. You create a fund in partnership with an existing 501(c)(3) organization and then advise on the donations. When you start a donor-advised fund, you get a tax deduction for the year in which you make the gift (see rules for public charities in the chart below). The assets can be distributed to charities over many years. 

Tax planning is critical

Careful planning can help you maximize the tax benefit of your charitable giving. Consider working with your tax, legal and financial professionals to determine the best assets, timing, amounts and forms of the gifts you’d like to make. When you can align your financial plans to support a greater cause – and claim tax deductions in the process – everyone can benefit. 

Learn how U.S. Bank can help you and your family develop a charitable giving strategy.