The charitable contribution tax deduction often has a double benefit. One benefit is the contribution can be used for good in the community. Another benefit for many taxpayers is an income tax deduction.
The charitable contribution deduction allowed for any one year is based on the taxpayer’s adjusted gross income (AGI) without regard to net operating loss carrybacks.
In general, the charitable contribution deduction is subject to limitations of 100 percent, 60 percent, 50 percent, 30 percent, or 20 percent of AGI depending on the type of property contributed, type of organization receiving the contribution, and tax year of the contribution. A contribution to a qualified public charity generally is subject to higher limitations than a private foundation.
The most common types of property contributed are cash and capital gain property. Cash is deductible in full up to the applicable AGI limitation. The deduction for capital gain property is determined by the holding period of the property. If the property is securities held for one year or less (short-term capital gain property), the deduction is limited to the basis (original purchase price) of the property. If the property is held for more than one year (long-term capital gain property), the deduction is the fair market value of the property at the date of delivery, transfer, or mailing to the charity. The taxpayer can elect to reduce the deduction for long-term capital gain property to the basis of the property. By making that election, the deduction limitation is increased from 30 percent of AGI to 50 percent of AGI.
- Cash contributed to a public charity in 2021 – Limitation is 100 percent of AGI.
- While a donor-advised fund generally is considered a public charity for purposes of calculating the AGI limitation, cash contributed to a donor-advised fund in 2021 is subject to a 60 percent AGI limitation rather than 100 percent.
- Cash contributed to a public charity in 2022–2025 – Limitation is 60 percent of AGI.
- Cash (in 2026 or later) or short-term capital gain property contributed to a public charity – Limitation is 50 percent of AGI.
- Cash and short-term capital gain property contributed to a private foundation – Limitation is 30 percent of AGI.
- Long-term capital gain property to a public charity – Limitation is 30 percent of AGI.
- Long-term capital property to a private foundation – Limitation is 20 percent of AGI.
Excess charitable contributions that are not allowed in a tax year due to these limitations are carried forward for five years.
The deduction for charitable contributions is part of the taxpayer’s itemized deductions. If the taxpayer’s total itemized deductions do not exceed the standard deduction, the taxpayer generally will report the standard deduction on their tax return. However, for tax year 2021, a taxpayer who reports the standard deduction can deduct up to $300 ($600 if married filing jointly) of cash charitable contributions to a public charity in addition to the standard deduction.
A taxpayer who is of the age to take required minimum distributions from their IRA can choose to make a distribution up to $100,000 directly from the IRA to a charity or charities, and that amount would count toward the taxpayer’s required minimum distribution amount for the year. A distribution directly from the IRA to a charity is called a qualified charitable distribution (QCD). A taxpayer does not report the QCD as income but does not report a charitable contribution deduction either. One benefit of a QCD is the taxpayer’s AGI is not increased, which could allow other deductions that have an AGI limitation such as medical expenses. Another benefit is the lower amount of AGI may keep the taxpayer below thresholds where net investment income tax or additional Medicare tax is incurred.
Taxpayers have several strategies to enhance their charitable contribution deduction. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.