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A Review of Charitable Cash Donations

12/12/2016  |  By: Blake Harrison, Senior Manager, Tax

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Charitable contributions are an excellent method to reduce your tax bill in addition to supporting your favorite charities of choice and helping to support your community. However, there are various restrictions set in place by the IRS with regards to charitable contribution deductibility which can be confusing. Contributions must be made to qualified organizations and they must be appropriately substantiated.

Benefits of Charitable Giving

The tax benefits of charitable contributions vary depending on the taxpayer’s individual situation. Depending on the type of contributions made, the IRS has placed some limitations on the amounts that can be claimed as a deduction on a return.

Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The substantiation requirements depend on the gift’s value:

  • Gifts under $250 can be supported by a canceled check, credit card receipt or written communication from the charity.
  • Gifts of $250 or more must be substantiated by the charity.

For donations under the adjusted gross income (AGI) limits, the reduction in tax liability will depend on the tax bracket the taxpayer is in. The taxpayer must itemize deductions on Schedule A and may be subject to overall Schedule A deduction limits that have been put in place for higher income taxpayers.

  • The total cash contributions a taxpayer can make in any given year cannot exceed 50% of the taxpayer’s AGI for the year or 30% if made to a private non-operating foundation (with some exceptions).
  • There are 30% and 20% limitations placed on contributions of non-cash appreciated property, depending on the type of qualified organization.
  • If the donation amounts exceed these thresholds, the excess deduction can be carried over to future tax returns for five years.
  • Donations to qualified charities generally are fully deductible for regular tax and AMT purposes and can also help higher-income taxpayers reduce their estate tax exposure.

Charitable contribution deductions are allowed for AMT purposes, but your tax savings may be less if you’re subject to the AMT. For example, if you’re in the 39.6% tax bracket for regular income tax purposes but the 28% tax bracket for AMT purposes, your deduction may be worth only 28% instead of 39.6%. In addition, other tax benefits can be realized by the many different forms of charitable giving, including donated appreciated assets thereby saving the capital gains taxes on those assets.

What’s New in 2016!

The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRA to qualified charitable organizations up to $100,000 per tax year. The taxpayers can’t claim a charitable or other deduction on the contributions. But the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution.

To take advantage of the exclusion from income for IRA contributions to charity on your 2016 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by Dec. 31, 2016. Donor-advised funds and supporting organizations aren’t eligible recipients.

Qualified Charitable Organizations

In order for taxpayers to deduct charitable contributions, they must be made to a qualified organization and not for the benefit of a specific individual. The following are a few examples of organizations that qualify:

  • churches
  • most nonprofit organizations such as American Red Cross and Goodwill
  • nonprofit hospitals
  • educational organizations
  • nonprofit organizations that service public parks and recreational areas
  • community foundations
  • private foundations
  • charitable trusts

Taxpayers can ask any organization whether or not it is a qualified organization, and they should be able to inform the taxpayer accordingly. The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://www.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Donation Deadlines

To ensure charitable donations will be deductible on your 2016 return, you must make their “unconditional delivery” by Dec. 31 and the organization must be eligible to receive tax-deductible contributions. The delivery date depends in part on what you donate and how you donate it.

Here are a few examples for common donations:

  • Check. The date you mail it.
  • Credit card. The date you make the charge.
  • Pay-by-phone account. The date the financial institution pays the amount.
  • Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

For information on stock donations, large contributions and how to put your donations to work for you, download our 2016 Individual Tax Planning Guide.