Broker Check

Charitable Tax Deductions

| February 07, 2024

One of the most commonly misunderstood areas of the tax code are the provisions around charitable tax deductions. Therefore, it is important for taxpayers to understand the rules so they can plan their tax deductions accordingly.

First, many people may not benefit, or benefit very little, from contributions to charity. Charitable contributions are an itemized deduction. To benefit, the total of a taxpayer’s itemized deductions must exceed their standard deduction (the automatic deduction that all taxpayers get). Since the standard deduction increased, and the amount of state and local taxes that can be claimed as an itemized deductions were capped in 2017, many taxpayers do not get a tax benefit from charitable contributions. However, there may be other strategies that taxpayers can use such as Qualified Charitable Distributions from IRAs, Donor Advised Funds (DAFs), or charitable trusts, if the taxpayer plans ahead.

Second, not all payments to charity are tax deductible. For a charitable contribution to be a tax deduction, the taxpayer must not receive any value in the form of goods or services. So, a donation to a silent auction to receive a prize or the ticket to attend a crab feed will not be fully deductible. Instead, the value of the goods or services received in exchange for the donation must be subtracted from the amount donated. In addition, the taxpayer must have documentation from the charity showing that either no goods and services were received in exchange for the donation or that the value subtracts the value of the goods and services received from the amount of the donation.

Third, a taxpayer who donates their time to a charity is not allowed a charitable deduction. Some taxpayers assume that they can apply their normal hourly compensation rate to the time they spend working on behalf of a charity and take that amount as a donation.

Unfortunately, charitable donations are only allowed for after tax contributions. Since labor donated to a charity is not subject to taxation it is considered pre-tax and therefore is not allowed as a tax deduction. However, an individual may work separately to earn taxable income and then donate the money to charity and claim a tax deduction.

Fourth, there is no standard amount for charitable contributions. Any donations by cash, check, or credit card must be supported with records of the donation. In-kind donations of “stuff” to a charity must also be documented but the tax reporting rules are different depending on the amount. An amount of $500 or less is not required to be itemized on the tax return. But if the value exceeds $500 the taxpayer must list the organizations the items were donated to, the address or the organization, the date of the donation, a description of the items donated, and how those items were valued.

Fifth, there are some dollar limitations to be aware of. Taxpayers are not allowed an unlimited donation for charitable contributions. Instead, the donation amount is limited to a percentage of the taxpayer’s income. The percentage depends on the type of charity the taxpayers donated to. In addition, in-kind contributions valued at $5,000 or more must be documented with an appraisal of the property donated. However, an exception to this rule applies to the donation of a motor vehicle where the vehicle is sold by the charity at auction. In this case, the value of the donation is the auction sales price which must be reported to the taxpayer by the charity.

Given the complex rules around charitable donations, it is advisable that taxpayers consult a tax expert before making charitable donations to make sure they are able to claim the maximum tax benefit available to them.