Taxpayers can lower their taxable income by incurring travel, paying for out-of-pocket expenses as a volunteer, or directly giving money or property to any of the following:
- Churches, synagogues, temples, mosques or other religious organizations;
- Federal, state and local governments (if the contribution is solely for a public purpose);
- Nonprofit schools and hospitals;
- Public parks and recreational facilities;
- Service organizations (e.g., Salvation Army, Red Cross, CARE, United Way, Boy/Girl Scouts, etc.);
- War veterans’ groups; and
- Other organizations listed in IRS Publication 78.
The deduction for charitable contributions to the preceding groups cannot exceed 50% of a taxpayer’s adjusted gross income (“AGI”); moreover, certain contributions have a reduced limit of 30% or 20%. Contributions that exceed the AGI limit in the current year can be carried over to each of the five succeeding years.
Transferring cash is the simplest way to make a tax-deductible contribution because cash does not have to be valued, costs associated with title transfers are avoided, and the AGI limits on cash contributions are generally higher than the limits on non-cash contributions. Transferring property is more difficult because of associated transfer costs and special rules governing specific types of property (e.g., tangible personal property, intangible personal property and real property).
Taxpayers should consider the following strategies before making contributions to ensure that they are maximizing the charitable contribution deduction:
- Cash – ensure cash contributions are made in a year when the taxpayer can itemize deductions;
- Appreciated short-term capital gain property, inventory, or donor-created property – limit donations to property for which fair market value approximates cost or delay donations until the property has been held for more than one year so that fair market value can be deducted instead of adjusted basis;
- Appreciated long-term capital gain property or tangible personal property donated for use unrelated to a charitable group’s exempt function – donate the property instead of cash to avoid the tax on the unrealized gain;
- Appreciated tangible personal property for charitable group’s unrelated use – donate property when fair market value approximates cost (if long-term capital gain property, sell at fair market value and donate proceeds so gain is taxed at lower capital gain rate and deduction is taken against higher ordinary income tax rate);
- Appreciated gifts to private non-operating foundations – donate property with fair market value that approximates cost or donate qualified appreciated stock eligible for fair market value deduction (if long-term capital gain property, it may be more beneficial to sell the property and donate proceeds because of the tax rate differences);
- Depreciated property used in a trade or business or for the production of income – sell the property (thereby recognizing the tax loss) and donate the proceeds to obtain a combined deduction equal to the entire tax basis; and
- Depreciated personal use property – since the loss on sale cannot be recognized for tax, donate the property or sell the property and donate the proceeds as both options yield the same tax deduction.
Before making charitable contributions, particularly property contributions, contact Flexible Accounting Services of the Triangle so we can assist you in maximizing your charitable contribution deduction.