7 minute read
Historically, most charitable donations come from individuals rather than corporate entities, and the last couple of years were no exception. Even in the pandemic, 78% of charitable donations came from individual taxpayers. Clearly, your support makes an impact. Donating to charity is fulfilling, and receiving tax incentives for doing so can add an extra layer of gratification.
Making annual charitable donations can reduce your tax liability, but only if you itemize your deductions.Today, the standard deduction is so high that only around 10% of taxpayers itemize their deductions (down from 30% in 2017, when the standard deduction was much lower). A temporary tax law allows all taxpayers to deduct up to $300 of cash contributions in 2020 and up to $600 in 2021, regardless of whether they itemize or take the standard deduction.
| Single + Married Filing Separately | $12,950 |
| Married Filing Jointly | $25,900 |
| Head of Household | $19,400 |
To calculate your itemized deductions, add up all deductible expenses. This includes charitable donations, mortgage interest, real estate taxes, personal property taxes, medical expenses above certain thresholds, casualty losses and other expenses listed on Schedule A of your tax return. If your itemized deductions exceed the standard deduction, your charitable contributions may help lower your tax bill.
Keep the standard deduction in mind when planning charitable contributions. Donating a large lump sum in one year rather than spreading that donation out over several years may help you cross the standard deduction threshold. In those years you donate a large sum to charity, you can itemize your deductions so that your contributions yield you a tax deduction. In other years, you can take the standard deduction. This strategy is often called “bunching” or “stacking” your charitable donations, and it can be quite effective in maximizing the tax benefits you get from your donations.
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When calculating your charitable contribution deduction, there are three things you should keep in mind:
For example, when you donate appreciated shares of stock that you’ve held for at least a year to an IRS-qualified 501(c)(3) homeless shelter, your deduction will be the fair market value of that stock but limited to 30% of your AGI.
The chart below helps you determine your deduction for the most common types of donations.
| Type of Donation | Deduction Amount (Generally) | Deduction Limits* (Generally) |
| Cash | Deductible at cash value Donations can be made with cash, check, debit card or credit card. | 100% of AGI in 2020 and 2021 60% of AGI starting in 2022 |
| Appreciated stock held more than one year Securities worth more today than when you acquired them | Deductible at fair market value Donating stock directly to the charity (rather than selling it and donating the proceeds) helps you avoid both capital gains and the net investment income tax (NIIT). | 30% of AGI |
| Stock held for one year or less | Deductible at the lesser of fair market value or basis | 30% of AGI |
| Virtual assets held more than one year e.g., cryptocurrency, NFTs, tokens | Deductible at fair market value Donating virtual assets directly helps you avoid capital gains and the NIIT, much like when you donate appreciated stock. | 30% of AGI |
| Personal Property e.g., clothing, household goods, artwork, jewelry in “good” condition or better | Deductible at fair market value | 50% of AGI |
| Unreimbursed charitable travel expenses e.g., parking costs, tolls, rideshare (not reimbursed by the charitable organization) | Deductible at cost Charitable miles driven are deductible at 14 cents per mile. | 60% of AGI |
Charitable contributions are typically only deductible when made to a qualifying 501(c)(3) organization. To check if a charity is qualified, use the IRS Tax Exempt Organization Search Tool.
To substantiate your donation, you should document the date, type of donation, name and address of the charity, as well as the following:
With all its rules, limitations and caveats, the charitable deduction is surprisingly complex. But knowing at least some of these rules is important. When you optimize your charitable deduction, you can stretch those donation dollars to provide even better support to organizations you believe in.
To learn about other tax-advantageous methods for donating to charity, click here to read more about donor-advised funds, charitable trusts and private foundations.
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