Giving Gifts to Charity

Written by Jim Worthington on November 18, 2018

Last week’s post discussed gift-giving in general with a promise to look more closely at gifts to charity. Gifts to charity aren’t governed by the gift tax rules but by the income tax rules. Essentially, giving to charity is deemed so socially valuable that Congress encourages it by allowing an income tax deduction that may reduce income tax liability.

That income tax deduction is limited in a couple of ways. The first is that it is limited to a certain percentage of adjusted gross income. The percentage depends on the type of asset given and the type of charitable recipient. The matrix below summarizes it:

The rules are quite complex. For example, certain private foundations are included in the public charity group.

The second practical limit on charitable giving is the standard deduction. The 2017 Tax Act set a high standard deduction starting in 2018. For 2018, it is $12,000 for most individuals and $24,000 for most couples. One won’t itemize deductions if one’s charitable deductions, when added to one’s other preferred deductions such as the one for home mortgage interest, are below the standard deduction. One solution to this limitation is called bunching, where one combines several years’ contributions into one year so that one exceeds the standard deduction that year and then falls back on the standard deduction in the other years.

Some other nuances of charitable giving include the rule that if a charitable deduction exceeds the percentage limits one year, the excess may be carried forward for up to five years. It is also best to give appreciated assets because one not only gets the deduction for the assets’ full value, one also foregoes recognizing the inherent capital gain that would spring into life on a sale of the asset. For that same reason, it is not a good idea to give depreciated assets as the unrecognized loss is permanently foregone.

The charity must acknowledge the gift and the value of any goods or services received in exchange for it as the deduction is limited to the excess over that value. Finally, one may be required to have an appraisal to substantiate the value of the donated asset.

This article presents the basics and some generalities. Consulting a tax advisor is the only way to make sure you are in compliance and getting the maximum deduction possible for your specific situation.