Charitable Deductions – Best Practices and Limitations

I have often wondered how much charitable giving would decline if the giver did not receive a tax deduction. We may find out, as the Trump tax plan (still in the works) is reportedly going to reduce rates, but significantly limit charitable deductions.

Limitations on charitable deductions:

Charitable contributions are currently deductible if you itemize your deductions. Charitable deductions are limited to 50% of your adjusted gross income when donating to a public charity and 30% of AGI when donating to a private foundation. Very few people have to worry about those limitations, but we thought you should be aware of them in case you are feeling extremely generous. Contributions beyond the AGI limit can be carried forward for up to five years and, hopefully, deducted in those future years. Like many tax topics, there are lots of fun little nuances with charitable deductions.

Here are four things you should know about charitable deductions:

  1. You can deduct the full fair market value of a stock that has appreciated as long as you have owned it for more than a year. For example, suppose you bought a stock for $75 and it is worth $200 today. You can avoid paying tax on the $125 capital gain and get a tax deduction on the full $200.
  2. If you owned the stock in the example above for less than a year, then you only get to deduct $75 (your cost basis), even though the stock is worth $200 at the time you donated it. Bummer 🙁
  3. Noncash donations (other than securities) are another interesting area. You can generally only deduct what you paid for the item (the cost basis) unless the item is used by the organization for the charity’s chartered purpose. For example, you only get to deduct $2,000 if you donate a painting with a cost basis of $2,000 and a fair market value of $50,000 to a children’s shelter. You would be better off donating the painting to a museum that will display it, in which case you can deduct the full $50,000 FMV
  4. Itemized deductions begin to be phased out once a single person earns more than $259,400 or married taxpayers earn more than $311,300 (AGI) for 2016. So high income donors may not get much of a tax deduction anyway.

Okay, enough about charitable deductions. Let’s talk about the generosity of our citizens:

In 2016, giving hit a new record. We gave $390 billion to charitable causes, which marks seven consecutive years of increases. Charitable giving increased 4.7% over 2015 and now represents approximately 2.22% of GDP (the total economy). Eighty percent of that giving is coming from individuals and the other 20% from corporations and foundations.

The largest beneficiary of all this giving is religious organizations (32% of all charity), followed by educational institutions (15%), human services (12%), health (8%), and environment and animals (3%). See graphic below to see all of the categories.

Charitable Deductions - Best Practices and Limitations

How to research charities:

Not sure what charity to support or which charities are making the biggest impacts? I am a big fan of Charity Navigator. This free website allows you to search for charities by name, topic, and/or location. They rate charities based on financial disclosures, accountability, and transparency. You can even see how much of each donation goes to their programs vs. fundraising/admin, and how much their CEOs earn. Here are some other resources from their site that may help:

If you are looking for information on other deductions, check out: Tax Deductions: What You Need To Know or Capital Gains: Details & Nuances.