Understanding End-of-Year Gifts and Charitable Giving

The end of the year is filled with joy, generosity, and tax planning. As we approach year-end, it’s important to be aware of charitable giving rules and regulations to properly advise clients. In this article, we’ll explore how to identify charitable organizations, deduction limitations, and donation deadlines.  

Identifying Qualifying Charitable Organizations

Only donations and gifts remitted to qualified organizations are eligible for a deduction. According to Publication 526, the following organizations are considered qualified:

• A community chest, corporation, trust, fund, or foundation organized for a charitable, religious, scientific, literary, or educational purpose.
• Organizations focused on the prevention of children or animal cruelty.
• War veterans’ organizations.
• Nonprofit volunteer fire companies.
• Domestic fraternal societies, orders, and associations under the lodge system. Deductions are only allowed if the contribution goes toward a charitable, religious, scientific, literary, or educational purpose.
• Nonprofit cemetery companies and corporations. Contributions for a specific lot or mausoleum crypt are non-deductible.
• Contributions made to federal or state governments for the use of public purposes.

Additionally, each qualifying organization must have been created under the laws of the United States or the District of Columbia. It’s also important to note that existing tax treaties treat contributions to certain Canadian, Mexican, and Israeli charities as tax deductible. Taxpayers can verify the tax-deductibility of contributions through the Tax Exempt Organization Search tool on the IRS website.

The IRS further differentiates qualifying charitable organizations into two categories: first category and second category. These categories determine which Adjusted Gross Income (AGI) limitation the contribution is subject to. Most charitable organizations fall into the first category; however, the IRS has a complete listing in Publication 526.

Non-Deductible Contributions

The IRS is very specific on the types of contributions that do not qualify for a tax deduction, which includes:

• Contributions to specific individuals.
• Contributions to nonqualified organizations, such as chambers of commerce, civic leagues, country clubs, foreign organizations, HOAs, labor unions, political organizations, and certain state bar associations.
• Contributions made in exchange for economic benefit.
• The value of the taxpayer’s time or services, personal expenses, and appraisal fees.
• Non-taxable Qualified Charitable Distribution (QCD) made from an IRA, SEP, or SIMPLE IRA.

Charitable giving made through third-party platforms, like GoFundMe, are only eligible for a tax deduction if the organization is a qualifying charity. A donation to an individual for a personal cause is non-deductible.

Claiming Charitable Tax Deductions

Charitable donations and gifts are deductible on Schedule A of Form 1040 if the taxpayer itemizes their deduction. However, additional forms are required to be attached to the tax return for noncash contributions exceeding $500. For contributions over $500 but under $5,000, the taxpayer will need to remit Form 8283, Noncash Charitable Contributions, which outlines where the contribution went, the date of the contribution, and information about the contributed property.

Property donated in excess of $5,000 requires two pieces of information. First, Form 8283 must be attached to the return. Next, a qualified written appraisal (CWA) of the donated property is required. A CWA is not required for qualified vehicles, certain inventory, traded securities, and certain intellectual property.

It’s important to note that the deductible amount is net of any economic benefit. For example, a taxpayer makes a $500 donation to a qualifying charity to attend a dinner event. The estimated value of the dinner is $50 per ticket. As a result, the taxpayer’s qualifying contribution is $450. 

Limitations on Charitable Donations

Charitable donations are limited to a percentage of AGI, depending on the type of property contributed. First, cash contributions to charitable organizations are limited to 60% of AGI. Next, noncash contributions, except for capital gain property, are limited to 50% of AGI. There is one exception for qualified conservation contributions made by farmers and ranchers. These contributions are limited to 100% of the taxpayer’s AGI minus deductions for other charitable contributions.

Furthermore, contributions are limited to 30% of AGI for capital gain property and second category organizations that do not qualify for the 50% AGI limit. Finally, noncash contributions of capital gain property to second category organizations are subject to the lessor of 20% of AGI, 30% of AGI less capital gain contributions, or 50% of AGI less all other contributions.

Important Charitable Giving Deadlines

Charitable contributions and gifts must be remitted by December 31 to be eligible for a deduction for the tax year. Donations submitted by credit card, bank account transfer, cash, or third-party apps must be submitted and received by December 31. Similarly, checks sent via U.S. Postal Service must be postmarked by December 31. Noncash items should be received by the organization by December 31.

Summary

As tax professionals, it’s important to understand the AGI limitations and types of eligible charitable organizations to properly advise taxpayers on end-of-year charitable giving. Although major charitable giving regulation changes are not expected, this information does come from 2023’s Publication 526. For the most up-to-date information surrounding charitable gifting, visit the IRS website.

By Rachel Szeklinski, CPA

Sources

• IRS Publication 526 (2023), Charitable Contributions | Internal Revenue Service (irs.gov)
• IRS Form 8283 (2023), Noncash Charitable Contributions | Internal Revenue Service (irs.gov)