Charitable contributions

An overview of the rules for giving, valuing, substantiating, and reporting tax-deductible charitable contributions

Americans gave over half a trillion dollars to US charities in 2023. In 2024, US taxpayers will also give to, and volunteer for, disaster relief efforts from Hurricanes Helene and Milton, along with presidential and other political campaigns. As tax professionals help clients plan for 2024 taxes and approach tax preparation season, it’s essential to understand the tax rules around charitable giving.

Individuals can claim an itemized deduction for charitable contributions to qualified organizations.¹ Tax law limits the deductible amount and requires substantiation depending on the value and type of the contribution. (C corporations can generally deduct charitable contributions, up to 10 percent of taxable income.²)

To determine the deductibility of a charitable contribution, a tax professional needs to know the following:

• The recipient organization

• The type of contribution

• The donor’s adjusted gross income and total itemized deductions

Depending on these facts, the tax professional may need additional information about the contribution, such as substantiation or a valuation.

Photo by Jon Tyson on Unsplash

Qualifying charitable organizations

IRC §170(c) defines a charitable contribution as a donation or gift to, or for the use of, a qualified organization. Qualified organization include the following:

• A state, possession, or political subdivision of the United States, if the contribution is for exclusively public purposes;

• A corporation, trust, community chest, fund, or foundation created or organized in the United States or a U.S. possession, which is “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals,” provides no benefit to any private shareholder or individual from net earnings, and is not disqualified for tax exemption under IRC §501(c)(3);

• A post or organization of war veterans organized in the United States that provides no benefit to any private shareholder or individual from net earnings;

• A domestic fraternal society, order, or association, operating under the lodge system, using the contribution or gift from individuals exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals (college fraternities and sororities do not qualify)³; and

• A cemetery company owned and operated exclusively for the benefit of its members, not operated for profit and provides no benefit to any private shareholder or individual from net earnings.

Most religious organizations (churches, temples, synagogues, mosques), nonprofit charitable organizations, colleges, museums, nonprofit hospitals and medical research organizations, and public parks and recreation facilities qualify. Contributions or membership dues paid to civic and business organizations, such as chambers of commerce, civic leagues, country clubs, homeowners associations, labor unions, and political organizations usually do not qualify as charitable contributions.

NB Contributions to political campaigns do not qualify as charitable organizations. With this year’s political activity, tax professionals and advisors should communicate this to their clients proactively.

Contributions to foreign charitable organizations generally do not qualify as deductible; however, if a qualifying organization carries on charitable activities outside the U.S., a taxpayer may deduct contributions to the organization.⁴

The IRS provides a free tax exempt organization search tool to help confirm whether an organization qualifies. However, the search tool may not include qualifying organizations exempt from filing, such as religious organizations.⁵

Qualifying charitable contributions

To qualify as a deductible charitable contribution, the taxpayer must voluntarily transfer money or her entire interest in property to a qualifying organization without receiving or expecting a substantial financial or economic benefit.⁶ If a taxpayer receives a benefit in exchange for a contribution, she may deduct the amount of the contribution in excess of the value of the benefit received, as long as she made the remaining contribution with the intention of a gift.⁷ Small benefits of token value, or sent to the taxpayer in connection with a fundraising campaign, are deemed to have insubstantial fair market value (FMV).⁸

If a taxpayer makes a gift to a specific individual, or earmarked for the benefit of a specific individual, including a disaster victim or a needy person, the taxpayer cannot deduct the gift as a charitable contribution.⁹ This includes crowdfunded giving, such as GoFundMe.

A taxpayer may not deduct the value of her time or services. This includes lost wages and blood donations.¹⁰ A taxpayer may not deduct unreimbursed personal expenses incurred while performing services for a charitable organization, such as the cost of transportation or meals, unless the performance of services requires being away from home overnight.¹¹

Valuing charitable contributions

Generally, a taxpayer may deduct the FMV of property contributed to a qualified organization.¹² IRC §6662(h)(1) imposes a 40 percent gross valuation misstatement penalty, effectively doubling the accuracy-related penalty of IRC §6662(a).¹³

A taxpayer may need to reduce the FMV of appreciated property when calculating the deduction.¹⁴ The FMV of ordinary income property, such as inventory, works of art or manuscripts created by the donor, and short-term capital assets, must be reduced by the amount of ordinary income or short-term capital gain if the taxpayer sold it for FMV.¹⁵ This generally limits the value of the deduction to the lower of FMV or the taxpayer’s basis in the property. However, the taxpayer may deduct the FMV of appreciated property if she includes the ordinary or capital gain in gross income in the same year as the contribution.¹⁶ A taxpayer may deduct the FMV of certain long-term capital gain property, including qualified appreciated stock.¹⁷

A gift of property subject to a liability results in a bargain sale: if the FMV exceeds liability, the difference is a charitable contribution; however, if the liability exceeds the FMV, the taxpayer recognizes a gain.¹⁸

Contributions of clothing and household goods must be in good used condition or better to qualify for a deduction, unless the taxpayer includes a qualified appraisal with her return.¹⁹ Household goods include furniture, furnishings, electronics, appliances, and linens, but not food, antiques, artwork, jewelry, gems, or collections.²⁰

If a taxpayer contributes a motor vehicle, boat, or airplane with a claimed value of more than $500, she may deduct the lesser of the gross proceeds from the sale of property by the organization or the FMV or the property on the contribution date.²¹ If the organization significantly uses or materially improves the vehicle, or transfers it to a needy individual at a price well below FMV, the taxpayer can deduct the FMV of the vehicle on the contribution date.²²

For businesses contributing inventory, the business reduces the FMV of the inventory by the ordinary gain had the business sold the inventory. Thus, the deductible value of donated inventory is the lesser of FMV or cost, and inventory is reduced by the contribution’s cost (to avoid double counting as cost of goods sold).²³

Substantiating and reporting charitable contributions

Taxpayers should keep records of all monetary charitable contributions, including bank statements or written acknowledgments from the donee showing the name of the organization, date(s) of the contribution(s), and amount(s) given.²⁴ The taxpayer may rely on a paystub or Form W-2 for contributions made by payroll if she also receives a document prepared by the donee showing the required information.²⁵

For noncash charitable contributions over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions. She must also substantiate the donation, depending on the value of the contribution:

• Less than $250 A receipt showing the name and address of the donee, the date of the contribution, a description of the property, and in the case of securities, the name of the issuer and type of security.²⁶ When the taxpayer cannot practically obtain a receipt, such as deposits at a donee’s unattended drop site, she can satisfy the recordkeeping requirement by maintaining reliable written records.²⁷

• Between $250 and $500 A contemporaneous written acknowledgment from the donee including a description (but not value) of property donated, whether the donee provided any goods or services to the donor in consideration for the property donated, and if so a good faith estimate of the value of those goods or services or a statement they consist solely of intangible religious benefits.

• Between $500 and $5,000 A contemporaneous written acknowledgment (see above) and completion of Form 8283, Section A. For vehicle contributions, the taxpayer must also attach a copy of the acknowledgment.

• Over $5,000 A contemporaneous written acknowledgment (see above), a qualified appraisal, and completion of Form 8283, Section B, unless the property is a publicly traded security, certain intellectual property, a qualified vehicle, or inventory for sale. The appraiser must provide a declaration including the statement found in Treas. Reg. §1.170A-16(d)(4).²⁸ Note that Form 8283, Section B requires a signature of an official authorized to sign for the donee. A taxpayer who donates a vehicle, boar, or airplane must attach Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, Copy B or a similar statement received from the organization.

Passthrough entities (partnerships and S corporations) must abide by reporting, substantiation, and valuation rules at the entity level; however, deductions are denied at the partner or shareholder level.²⁹

NB Communicate the recordkeeping requirements for noncash contributions to clients before you receive the stack of blank Goodwill forms! Back-and-forth communication about these contributions slows down return preparation and reduces efficiency. If you prepare returns, clarify for clients how they should report charitable contributions to you and how they should substantiate those contributions.

Taxpayer limitations on deducting charitable contributions

A taxpayer must deduct a charitable contribution in the year made (or in a succeeding carryover year), regardless of whether the taxpayer uses the cash or accrual method.³⁰ A contribution is considered made when delivered or mailed.³¹

An individual taxpayer’s deduction for charitable contributions is generally limited to 50 percent (60 percent for tax years 2018, 2019, 2021–2025; 100 percent for 2020) of the taxpayer’s adjusted gross income (AGI) without regard to any net operating loss (NOL) carryback to that tax year.³² Gifts to certain organizations, of capital gain property to certain organizations, or “for the use of” rather than “to” a qualified organization are limited to 30 percent of AGI.³³ Gifts of capital gain property to certain organizations are limited to 20 percent of AGI.³⁴ A taxpayer may carryover charitable contributions in excess of the AGI limit for up to five years.

NB Deductible charitable contributions only benefit the taxpayer if they itemize! Discuss charitable giving, especially for tithers and philanthropists, if you offer year-end planning. The taxpayer may receive a greater tax benefit by accelerating contributions in the current year, “bunching” contributions in alternate years, or contributing appreciated long-term assets. A retiree may also consider a qualified charitable distribution (QCD) from an individual retirement arrangement (IRA), especially if she is required to take a minimum distribution (RMD).³⁵

A taxpayer contributing food inventory may not deduct more than 15 percent of the taxpayer’s net income from all trades or businesses contributing food inventory.