You can achieve significant tax savings—and support charitable organizations and causes—by strategically planning your charitable giving and carefully complying with tax law requirements for claiming your donations as itemized deductions. The key word here is itemized: To be able to deduct donations that qualify as deductible under the tax code, you need to list them on Schedule A of IRS Form 1040 instead of using the standard deduction. Here is how to assess your options and pick the best strategy.
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Which charitable donations are tax-deductible?
Donations of money or property to qualified charitable organizations can reduce your income tax liability. A qualified charitable organization is a nonprofit, tax-exempt entity that meets the requirements of tax Code section 501(c)(3). These entities— often referred to as “(c)(3) organizations—are corporations and any community chest, fund, or foundation, organized and operated exclusively for:
- Religious, charitable, scientific, testing for public safety, literary, or educational purposes.
- To foster national or international amateur sports competition.
- For the prevention of cruelty to children or animals.
There’s one more category: certain governmental entities that qualify as tax-exempt entities eligible to receive deductible contributions.
Beware of scams seeking contributions to fake charities. Generally, you can check an organization’s eligibility by searching the Exempt Organizations Business Master File on an IRS online tool. However, as of October 2023—because of IRS delays in processing paper filings—some organizations formed in 2021 or more recently may not yet be listed in the file.
Requirements for charitable deductions
Your charitable contributions must comply with federal tax rules designed to prevent improper deductions. Turbotax offers a tool, ItsDeductible, which helps you determine if a donation qualifies as a deductible contribution and how much you can deduct.
You cannot deduct contributions benefitting a specific individual or that provide you a “quid pro quo.” For example, the price for a ticket to a charity dinner generally has two components: (1) your meal, whose fair market value is a nondeductible quid pro quo, and (2) a charitable donation equal to the difference between the ticket price and the value of the meal. The sponsoring organization is required to disclose the deductible amount to ticket purchasers.
The tax law imposes substantiation, donee acknowledgement, valuation, and appraisal requirements depending on the type of gift. These rules generally become more detailed as the value of your contribution increases and they vary depending on whether you donate money or property.
If you make substantial charitable contributions, you may be subject to annual dollar ceilings on your charitable deductions. The ceilings are measured as percentages of your adjusted gross income (AGI), with lower caps applying to noncash gifts. However, deductions that exceed the ceilings generally can be carried forward for five years. Instructions for reporting charitable contributions, including AGI limits, are provided on standard tax-preparation tools such as TaxAct.
Standard deduction or itemization?
The threshold issue for most taxpayers is determining whether or not your itemized deductions—including charitable contributions—will result in greater tax savings than claiming the standard deduction. Generally, itemizing is preferable only if your total itemized deductions for a year exceed the amount of your standard deduction.
You can deduct a charitable donation as an itemized deduction on your tax return in the year that you make it. Taxpayers electing to claim the standard deduction cannot deduct their charitable contributions. Although in recent years the tax code allowed an individual to claim the standard deduction and also deduct up to $300 of contributions, ($600 on joint returns), that provision has expired.
Itemized deductions for charitable contributions now require not only that your donation go to a qualified organization, you also must comply with percentage AGI limitations, as well as substantiation and record-keeping rules. Understanding the requirements and the interplay of the standard deduction and itemizing, can yield considerable tax savings. The online tool, Playbook, for example, recognizes this relationship and touts tax-efficient financial planning.
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AGI ceilings
The annual amount of allowable charitable deductions may be capped based on your adjusted gross income (AGI) for the year. This limit varies depending on the nature of contributed assets. For 2023, you can deduct contributions to public charities, e.g., generally organizations with broad support such as the American Cancer Society, Habitat for Humanity, churches, operating foundations, nonprofit hospitals and schools, governmental bodies and donor-advised funds, totaling up to 50% of your AGI.
For gifts made in cash, or by check or credit card, the limit increases to 60% of your AGI. However, gifts to charities that do not qualify as public charities—e.g., private, non-operating, grantmaking foundations—are capped at 30% of AGI. A 30% AGI ceiling also applies to non-cash gifts of capital gain property held for a year or longer. Generally, deductible contributions that exceed a year’s AGI ceiling, can be carried forward for the next five years, subject to applicable AGI limits in the year claimed.
Planning opportunity: Bunching
If your total charitable contributions will not help you to exceed your standard deduction for a year, it may be worthwhile to “bunch” or group your charitable donations into a single year. By delaying charitable contributions from one year to the next and combining them with the second year’s donations, the sum of the contributions in year two may result in total itemized deductions that exceed the standard deduction amount. The increase in your tax savings over the standard deduction will equal the amount of itemized deductions in excess of your standard deduction multiplied by your top marginal tax rate.
For example, if you are filing a joint return for 2023 and your total itemized deductions for the year, including charitable contributions, will be less than 2023 standard deduction ($27,700), your charitable contributions will provide no tax benefit. However, assume you expect to have taxable income of $400,000 in 2024 and a projected top marginal tax rate of 32%. With the standard deduction on a 2024 joint return at $29,200, you might realize tax savings by delaying gifts planned for 2023 and bunching them with other contributions in the later year.
You could delay making charitable contributions slated for 2023 until 2024, or accelerate contributions otherwise slated for 2025 in 2024, or both. If bunching your 2023 contributions with your 2024 contributions—and the other itemized deductions you are entitled to claim, such as mortgage interest or state and local taxes—results in itemized deductions for 2024 that exceed your standard deduction, the amount of deductions exceeding the $29,200 standard deduction for joint returns will produce additional tax savings for 2024.
For example, assume that your itemized deductions for 2023, including charitable contributions of $20,000, do not exceed the 2023 standard deduction of $27,700. Assume further that deferring the $20,000 of charitable contributions until 2024 and adding them to your other 2024 itemized deductions results in total itemized deductions of $35,000. This total would exceed the standard deduction by $7,300. Your additional tax savings would be $7,300 multiplied by the marginal tax rate for your income bracket. If your 2024 taxable income is $400,000, your marginal bracket will be 32%. The tax savings would be $7,300 multiplied by 32%, or $2,336.
Bunching can be a very effective tax-savings strategy if you are planning a major charitable gift. Some charities, particularly colleges and universities, as well as others building endowments, often spread their special fundraising campaigns over a period of years. If you plan to donate to such a campaign, you can schedule your contributions for the campaign year or years when you have higher income and the gifts will provide you the greatest tax savings.
Gifts of appreciated property
Depending on your tax bracket, you can enjoy greater tax savings by donating appreciated property directly to a charity than by selling the property and contributing the cash from its sale. If you are an itemizer, your tax deduction for a charitable donation of appreciated stock, realty, or other non-cash asset is the property’s fair market value.
In addition, if you are single with taxable income below $44,625, there is no tax on the capital gain. For taxable income from $44,625 up to $492,299, there is a 15% tax on the appreciation. If your taxable income is $492,300 or higher, the tax rate is 20%. For joint returns, the taxable income thresholds are $89,250 for the 15% rate and $553,850 for the 20% rate. Heads of household pay 15% beginning at taxable income of $59,750 and 20% at $523,050 and higher. So, if you are an itemizer filing a 2023 joint return with taxable income of $200,000, and a contribution of property with appreciation of $100,000, your charitable-contribution deduction will save $15,000 in taxes.
Not all charities accept all types of property. For example, many lack the administrative capability to deal with certain properties, such as private company stock or artworks, that require special valuations or appraisals. So if considering a charitable contribution of property, check in advance with the charity to be sure that it accepts the type of property you want to donate.
Charitable trusts
Two types of irrevocable trusts combine charitable giving with tax benefits; charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). They offer high-net-worth individuals in particular opportunities for income, estate, and gift-tax planning. Structuring these trusts involves evaluation of complex legal, tax, and relationship issues. Many investment firms and charitable institutions offer clients and donors assistance in setting up, or donating to, these trusts. If you are considering using charitable remainder or charitable lead trusts, consulting legal, tax and financial experts is highly advisable.
Charitable Remainder Trust
Establishing a charitable remainder trust (CRT) can help with your own or your beneficiaries’ living expenses, while they produce tax savings and further your charitable goals. A CRT is an irrevocable trust that provides income to its beneficiaries for a specific term of up to a maximum term of 20 years or the lifespan of one or more beneficiaries. If you establish the CRT with appreciated assets, you can defer tax on the appreciation until the trust disposes of the assets. After the trust is established, additional contributions are not permitted.
Your CRT contribution entitles you to an immediate deduction equal to the present value of the remainder interest designated for charity. Your deduction equals the value of the contributed assets reduced by the present value of the annuity. This charitable deduction is subject to AGI limitations ceilings, but excess deductions are allowed a five-year carryover.
During the CRT’s term, the beneficiaries must pay tax on the amounts that they receive as ordinary income, to the extent the CRT realizes such income—and on capital gains, if the CRT realizes gains on asset sales. When the trust term expires, the remainder of the trust is distributed to one or more U.S. charities.
You can structure a CRT as a charitable remainder annuity trust or a charitable remainder unitrust. A charitable remainder annuity trust pays its beneficiaries a specific dollar amount annually, i.e., a fixed annuity, of at least 5% but less than 50% of the fair market value of the assets contributed to the trust at the time that the trust is created. A charitable remainder unitrust pays its non-charitable beneficiaries annually a percentage of not less than 5% nor more than 50% of the trust’s fair market value as determined each year. In setting up the trust, it is important to contribute appropriate income-producing assets or money, if necessary, to fund the CRT’s annual payments.
Charitable lead trust
A charitable lead trust (CLT) is an irrevocable trust that makes payments to one or more charities for a period of time and transfers the remainder interest to noncharitable beneficiaries, for example, the donor or the donor’s family members. CLTs are most commonly used for estate or gift-tax planning.
The term of a CLT is a set period of years or the life or lives of specified individuals. Unlike a charitable remainder trust, a term of years for a CLT is not subject to limitation. The payments to charity may be either payments of a fixed annual dollar amount during the CLT’s term or annuity payments based on a percentage of the value of the CLT’s assets. No annual minimum or maximum is prescribed for the annual payments.
A CLT may be established as a grantor or non-grantor trust. A grantor CLT provides the grantor an immediate tax deduction based on the value of the payments to be made to charity, but the grantor must pay tax each year on the trust’s future income. Generally, a grantor CLT is most beneficial for a donor who has a high income in the year that the CLT is created but anticipates lower income in subsequent years. However, if the donor dies before the end of the grantor CLT’s term, the donor’s final tax return must recapture as taxable income the amount of the initial charitable deduction reduced by the discounted value of the CLT’s payments to charity prior to the donor’s death.
With a non-grantor CLT, you can shift the tax liability on the income generated by the contributed assets away from yourself to the CLT. A non-grantor trust CLT is responsible for the tax on its income, but also is allowed a charitable deduction for the income paid to charity each year. The charitable deduction may shield most or all of the CLT income from taxation. A non-grantor CLT is most appropriate if you expect your income to be high throughout the trust term.
Donor-advised funds
Increasingly, taxpayers are taking advantage of donor-advised funds (DAFs) to manage and implement their charitable giving and maximize their tax savings. The value of your contributions to DAFs can be claimed as an itemized deduction in the year made. Your initial and any ongoing contributions are binding and cannot be reclaimed. However, you can recommend the investment of your contributions and the charities eventually to receive them. Many investment firms, including Fidelity and Vanguard, offer DAFs.
DAFS can help offset an unusually high tax liability on unanticipated income received late in a year, for example, because of an exceptional year-end bonus or even lottery or other gambling winnings. Your tax savings from a substantial DAF contribution for a year that will have a high marginal tax rate can be greater than the savings realized by making direct contributions to the charities totaling the same amount over several lower-income years. In subsequent years, you can recommend the DAF funds, which can grow tax-free, be distributed to one or more public charities, or perhaps, as a substantial gift to a charitable endowment, such as a special program for an educational institution or arts organization. DAF funds cannot be contributed to private foundations.
The DAF’s sponsor administers the fund and controls the contributions, but usually follows the donor’s recommendation provided the recipient organization qualifies as a public charity. Generally, DAFs charge administration and investment-management fees. Some DAFs require minimum initial contributions and some set a minimum amount for additional contributions as well. DAFs may accept a broad range of assets including cash, private and public company stock, publicly traded securities, distributions from IRAs and 401(k)s, and hedge-fund and private-equity interests. Some will accept Bitcoin and other cryptocurrency contributions. Internal Revenue Service.
The tax rules on gifts to charities also apply to DAF contributions. If you donate appreciated property to a DAF, you can deduct its fair market value and avoid any capital gains tax on the gain. And, your DAF donations are counted along with your other charitable gifts in determining if the AGI ceilings apply.
RMDs: Exclusions for qualified charities
Owners of traditional individual retirement accounts (IRAs) must begin taking required minimum distributions (RMDs) from their accounts once they reach a specific age. Taxpayers who turned 70½ years of age or older on or before the end of calendar year 2019 had to begin taking distributions the year they reached 70½. Beginning in 2020, the mandatory distribution age increased to 72 years. And in 2023, it rose to 73.
Be aware that you must take your first RMD for the year in which you reach the required age. However, for your first year only, you can delay taking the RMD until April 1 of the following year. So, if you reached 72 in 2022, you were allowed to delay taking your 2022 RMD until April 1, 2023; however, you must take your annual RMD for 2023 no later than December 31, 2023.
If you reach age 72 in 2023, you are not required to take an RMD until 2024, the year when you reach 73. Your RMD for 2024 will be due by April 1, 2025; your RMD for 2025 must be taken no later than December 31, 2025.
Individuals who have reached the age when they must take RMDs from their traditional IRAs have a special opportunity to realize tax savings through charitable contributions. These distributions generally are taxable as ordinary income. However, if IRA owners instruct their IRA trustee to transfer of some or all of their taxable RMDs, up to $100,000, directly to a qualified charity, the owners can exclude the amount going to charity, called a “qualified charitable distribution“ (QCD) in determining their adjusted gross income, thereby reducing their taxable income .
The exclusion of a QCD from income operates in the same way as a tax deduction to produce savings equal to the tax otherwise due on the amount of the charitable donation. You cannot “double dip” with QCDs, however: The amount excluded from income as a QCD cannot be claimed as an itemized deduction.
Moreover, an additional benefit is available to many of these IRA owners. Even if their total itemized deductions—e.g., mortgage interest, state and local taxes, and non-QCD gifts to charity—are less than the standard deduction, they can still claim the full standard deduction and obtain the tax savings provided by a QCD. Being able to claim the standard deduction can be a substantial benefit for older taxpayers who may have a low total of itemized deductions because of reduced retirement income, lower state and local taxes, and little or no interest expense after paying off home mortgages.
For 2023, the inflation-adjusted standard deduction including the additional amounts allowed for taxpayers age 65 or older is $15,600 for taxpayers who are single or married filing separately. For joint returns and qualifying surviving spouses it is $29,100, and for heads of household, $22,550. For married taxpayers with a marginal tax rate of 20%, a 2023 QCD of $5,000 will provide $1,000 in tax savings in addition to their savings of $5820 from the standard deduction.
TIME Stamp: Tax law incentivizes charitable contributions
You owe it to yourself to check out the tax benefits for charitable giving. In addition to direct charitable contributions, you can obtain tax benefits for varied donations and arrangements, including DAFs, charitable trusts, and IRA distributions to charity. Although you may need expert advice to use more complex arrangements such as trusts, the explanations of most charitable tax-saving opportunities are available free on the IRS website and accessible through online tax-preparation and financial-planning programs. A more advanced tax-prep service like TaxSlayer Premium gives you priority phone and email support and help from tax professionals.
Frequently asked questions (FAQs)
Can I get a tax deduction for donating to a tax-exempt organization?
You can claim a tax deduction for a donation to a tax-exempt entity provided that (1) you itemize deductions instead of claiming the standard deduction, and (2) the tax-exempt entity qualifies under tax Code section 501(c)(3) as a nonprofit, charitable organization. No deduction is allowed for gifts to organizations that may be tax-exempt but do not qualify as “(c)(3)” organizations, such as social welfare organizations, credit unions, chambers of commerce, and political organizations.
Is there a limit on the amount of donations that can be deducted?
There are annual limitations, that are set as a percentage of your adjusted gross income (AGI), on the amount that you can deduct for charitable contributions. The limits differ according to the nature of the donation (e.g., cash vs. real property) and the status of the organization. The allowance for donations to public charities, which generally are organizations with broad public support—such as Habitat for Humanity or college or university—is higher than that for a private non-operating foundation (an organization with only one or a few donors and directors, most commonly a grant-making foundation). Deductible contributions to public charities are capped at 50% of AGI except for contributions made in cash, by check or credit card which have a higher ceiling of 60% of AGI. There is a ceiling of 30% of AGI for gifts to charities that do not qualify as public charities, e.g., private, non-operating foundations. A 30% of AGI limit also applies to non-cash gifts of capital gain property held for a year or more.
What do I do if I have donated more than the annual limit?
You can carry forward charitable deductions that exceed the annual limit until fully claimed, but for no more than five years.There is an exception for deductions for qualified conservation easements which can be carried forward 15 years. Deductions carried forward to a subsequent year are combined with any deductions for charitable contributions made in that year and the combined amounts are subject to the annual limitations related to AGI, cash and non-cash contributions, and status of the charitable donee.
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