A tax professional's guide to charitable contribution deductions

In 2023, individuals gave over $374 billion to charities. When adjusted for inflation, six of the nine nonprofit sectors received donations that exceeded pre-pandemic levels. While altruism drives some of this generosity, it is also fueled by the charitable contribution (donation) deduction. To help you better serve your clients when providing tax preparation or planning services, we’re providing a deep dive into charitable contribution deductions and applying them on the 1040.

Table of contents

1. Understanding the charitable contribution deduction
2. What donations are eligible for the charitable contribution deduction?
3. Meeting the deadline
4. Calculating the charitable contribution deduction (by type)
5. Limits on deductions
6. Claiming the deduction on non-cash charitable contributions 
7. Tax planning strategies

Understanding the charitable contribution deduction

This deduction is valuable to taxpayers because charitable contributions create multiple tax savings by reducing income taxes, escaping gift taxes, and reducing the value of the estate subject to estate taxes. To be eligible for the deduction, taxpayers must itemize and file 1040 Schedule A (Itemized Deductions). This generally means that a taxpayer’s total itemized deductions exceed their standard deduction, which results in a larger reduction of tax. 

Because the standard deduction almost doubled beginning in 2018, fewer individuals are itemizing—resulting in a loss of the tax benefits associated with the charitable contribution deduction. Nevertheless, good tax planning can help restore some of these benefits by enabling taxpayers to reduce their taxes by itemizing and maximizing the charitable contribution deduction. Taxpayers continue to carefully plan their charitable contributions because data show that almost 30% of charitable contributions still occur in December, with about 10% of all contributions coming in the last three days of the year.

What donations are eligible for the charitable contribution deduction?

Taxpayers can only deduct charitable contributions if they are made to a qualified organization that has been granted tax-exempt status by the IRS. Generally, these organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.

 Individuals are never qualified organizations—even if the money is collected through a crowdfunding platform (e.g., GoFundMe). Contributions made to individuals are considered gifts and are subject to the gift tax rules. 

A qualified organization must generally be a U.S. charity, but certain Canadian, Mexican, and Israeli charities qualify if covered under an income tax treaty with the respective country. The best way to determine if an organization qualifies is to request a copy of its IRS determination letter. Taxpayers can also try to find the organization by using the IRS’ Tax Exempt Organization Search Tool¹ . 

Charitable contributions must also be paid in cash or other property. Individuals can’t deduct the value of time and personal services they provide to charities because they are not considered property. However, if the taxpayer has unreimbursed out-of-pocket expenses associated with performing services, the expenses are property and can be deducted (auto expenses can deducted at $0.14 per mile). 

Donating the use of property (e.g., a week’s use of a timeshare) is not considered a donation of property eligible for the deduction. While there are some narrow exceptions, taxpayers must generally donate their entire interest in the property (i.e., no partial or split interests) for the contribution to be deductible.

Quid pro quo contributions

In several instances, the taxpayer may receive a benefit in conjunction with a charitable contribution (known as a quid pro quo contribution). When this occurs, the contribution must be reduced by the value of the benefit when calculating the deduction. 

For example, many taxpayers contribute to organizations by making donations that enable them to attend a black-tie gala that includes a meal and cocktails. In this case, the value of the charitable contribution must be reduced by the value of the meal and cocktails. Moreover, to enable the contribution to qualify for the deduction, it is very important that what the taxpayer receives in return is both incidental and insubstantial in relation to the gift made. It is key that the taxpayer has charitable intent when making the contribution.

Meeting the deadline to use the charitable contribution deduction

Lastly, charitable contributions must be paid by the end of the tax year. This rule also applies to individuals who are accrual-basis taxpayers. Payments made by check are considered paid on the date the check is mailed. Credit card payments are considered paid on the date the charge shows on the statement. Payments may be made using a crowdfunding platform (e.g., GoFundMe) if the beneficiary is a qualified organization. If the taxpayer lives in a community property state, a charitable contribution of community property by one spouse will generally not be valid without the consent of the other spouse. Consent should be obtained by the end of the tax year, or the IRS may argue the contribution is incomplete and nondeductible.

Calculating the charitable contribution deduction: Types of property 

Calculating the charitable contribution deduction largely depends on the type of property given away. With some exceptions explained below, the general rule is that contributions are valued at the fair market value of the property on the date of the contribution. Hence, cash is the easiest because the deduction equals the amount of cash given to the charitable organization.

Intangible long-term capital gain property or real estate

When contributing intangible long-term capital gain property (e.g., stocks and bonds) or real estate, the amount of the deduction is the appreciated fair market value of the property. Long-term capital gain property is property that would have produced a long-term capital gain (held for more than one year) if it had been sold on the date of the contribution. This rule also applies to long-term capital loss property. The value of the deduction will be the depreciated fair market value of the property. Hence, taxpayers who want to donate such property should sell it so they can recognize the loss and donate the underlying cash.

Tangible long-term capital gain property

The amount of the deduction for tangible long-term capital gain personal property (e.g., cars, art, antiques, and jewelry) depends on how the charitable organization uses the contributed property. If the organization directly uses the property to further its charitable purpose or function, the amount of the deduction is the appreciated fair market value of the property. 

However, if the use of the property is unrelated to the organization’s charitable purpose or function, the amount of the deduction is limited to the taxpayer’s basis in the property. If the property is related to the organization’s charitable purpose or function but is sold by the organization after the donation, it is considered unrelated use property subject to the lower deduction amount. Books, art, music, and similar items must have been created or produced by someone other than the taxpayer to be classified as capital gain property. If such items are created by the taxpayer, they are considered ordinary income property.

Ordinary income property

Ordinary income property is property that would have produced ordinary income (not capital gain) if it had been sold on the date of the contribution. Common examples include capital assets held less than one year, inventory as well as books, art, music, and similar items created by the taxpayer. 

Contributions of ordinary income property are valued at the lower of the taxpayer’s basis or the fair market value of the property on the date of the contribution. For items created by the taxpayer (e.g., books, art, and music), no deduction is allowed for the taxpayer’s time and talent. For example, if an artist creates a painting that has a fair market value of $10,000 and donates it to a museum, she would only be able to deduct the cost of their materials (canvas, paint, etc.). 

Consequently, donations of substantially appreciated ordinary income property should be avoided. Capital assets should be held for more than a year to benefit from the appreciated fair market value deduction because it can produce two advantages. First, the taxpayer may be able to deduct the item at its appreciated fair market value. Second, the taxpayer does not have to recognize the related capital gain as income on their return (i.e., the gain escapes taxation). 

What are the limits on the charitable contribution deduction? 

If the taxpayer’s total contributions exceed 20% of adjusted gross income (AGI) for the year, there are various limitations on the amount of the charitable contribution deduction that can be claimed by the taxpayer. Such limitations, typically a percentage of AGI, depend on the type of property contributed and the type of charitable organization. 

The limitations are subject to an ordering rule and generally require using software or a spreadsheet to aid in calculation. All contributions in excess of the limits can be carried over for up to five years. However, unused carryovers will be lost upon the taxpayer's death if not used on the final tax return. 

Please note that these rules are very complex and nuanced. The most frequently encountered limitations are discussed below, but tax preparers should consult IRS Publication 526 (Charitable Contributions) for a more detailed discussion.

Donations to public charities and private foundations

Contributions to public charities are generally more favorable than those made to private foundations. Public charities are the most prevalent organizations and include churches, hospitals, and certain qualified medical research organizations. Other types include the following: 

• Have an active program of fundraising and receive contributions from sources such as the general public, government agencies, corporations, private foundations, or other public charities, 
• Receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or 
• Actively function in a supporting relationship to one or more existing charities. 

Examples include the American Red Cross, the United Way, Save the Children, and Americares. 

In contrast, private foundations typically have a major source of private funding from one family or corporation (e.g., the Bill and Melinda Gates Foundation). Private foundations generally bestow grants to other charitable organizations and individuals, rather than the direct operation of charitable programs. They are further classified as operating and nonoperating depending on the amount of assets spent each year on charity and such classification can change each year. Therefore, taxpayers must consult with the private foundation to determine its classification for the year.

Limitations on claiming the charitable contribution deduction based on the type of donation

Contributions of cash and unreimbursed out-of-pocket expenses to public charities, government organizations, and private operating foundations are limited to 50% of the taxpayer’s AGI. However, this limitation has been increased to 60% of AGI through 2025 for cash contributions. While contributions of cash and unreimbursed out-of-pocket expenses to certain private nonoperating foundations may qualify for the 50% limitation, the general rule is such contributions are limited to 30% of AGI.

Intangible property contribution limits 

Contributions of appreciated capital gain property classified as intangible personal property or real property to public charities, government organizations, and operating foundations are limited to 30% of AGI. However, the 30% limit can be increased to 50% if the taxpayer elects to reduce the value of the contribution by the amount of the capital gain. This election can be very valuable when the taxpayer makes contributions subject to the limitations and the amount of the appreciation is small.

Tangible property contribution limits

Limits on contributions of appreciated capital gain property are classified as tangible personal property depending on how the charitable organization uses the property. For contributions of such property to public charities, government organizations, and operating foundations, the limit is 30% of AGI if the organization directly uses the property in furthering its charitable purpose or function. If the property is not put to such use, the limit is 50% of AGI. Generally, all contributions of all appreciated capital gain property to nonoperating foundations are limited to 20% of AGI.

Ordinary income property contribution limits

Contributions of ordinary income property to public charities, government organizations, and operating foundations are limited to 50% of AGI. Such contributions to nonoperating foundations are generally limited to 30% of AGI. How to claim the charitable contribution deduction based on contribution type 

Monetary contributions 

Taxpayers must have a record or a timely written communication for all monetary charitable contributions before deducting them on the 1040 Schedule A. Monetary contributions include: 

• Cash 
• Check 
• A transfer of a gift card redeemable for cash 
• Credit card payment 
• Electronic funds transfer 
• Online payment service, 
• Payroll deduction

Canceled checks, receipts, or other reliable written records that show the name of the charitable organization, the date of the contribution, and the amount of the contribution should be maintained as records. A timely written communication is a receipt, letter, or email the taxpayer receives from the charitable organization. 

To be valid, all required documentation must be obtained before the earlier of the date the taxpayer files their original tax return for the year the contribution was made or the due date, including extensions, for filing the original tax return for that year. Failure to adhere to these rules may result in disallowance of the charitable contribution deduction. 

To substantiate monetary contributions made by payroll deduction, the taxpayer can use a pledge card prepared by or at the direction of the charitable organization, along with one of the following documents: 

1. A pay stub
2. Form W-2 (Wage and Tax Statement)
3. Other employer-furnished document that shows the amount withheld and paid to the charitable organization

If the donor makes a single monetary contribution of $250 or more by payroll deduction, the pledge card or other document from the charitable organization must also include a statement that the organization did not provide goods or services in exchange for the contribution (if that was the case). Each payroll deduction of $250 or more is treated as a separate contribution for purposes of this requirement. 

All required documents must be obtained before the earlier of the date the taxpayer files their original tax return for the year the contribution was made or the due date, including extensions, for filing the original tax return for that year. Failure to adhere to these rules may result in disallowance of the deduction.

Quid pro quo contributions

For quid pro quo contributions (payments consisting of both a donation and a purchase of goods and/or services) of $75 or more, the charitable organization is required to provide a written disclosure statement to the taxpayer. The written disclosure acts as a record of the value of the goods and/or services obtained by the taxpayer and must: 

1. Inform the taxpayer that the amount of the deductible contribution is limited to the excess of the money (and the fair market value of other property) contributed by the taxpayer over the value of goods and services provided by the organization.
2. Provide the donor with a good faith estimate of the fair market value of the goods and services.

For any single monetary and nonmonetary contribution of $250 or more (including unreimbursed out-of-pocket expenses), the taxpayer must obtain a contemporaneous written acknowledgement from the charitable organization that includes the following: 

1. The name of the charitable organization 
2. The amount of any monetary contribution and/or a description (but not the fair market value) of any contribution or property
3. A statement that no goods or services were provided by the organization in return for the contribution (if that was the case)
4. If the organization did provide goods or services in return for the contribution, a description and good faith estimate of the fair market of the goods or services. 
5. If the organization only provided intangible religious benefits in return for the contribution, a statement stating such. 

A separate contemporaneous written acknowledgement may be provided for each single contribution valued at $250 or more, or one acknowledgement (e.g., an annual statement) may be used for a record of multiple single contributions valued at $250 or more. Separate contributions of less than $250 should not be aggregated in the total, even if total annual contributions by the taxpayer to the organization exceed $250. 

To be contemporaneous, the written acknowledgement must be obtained before the earlier of the date the taxpayer files their original tax return for the year the contribution was made or the due date, including extensions, for filing the original tax return for that year. Canceled checks, alone, are not adequate for these contributions. Failure to adhere to these rules may result in disallowance of the charitable contribution deduction. Contemporaneous written acknowledgements are not filed with the return.

Claiming the deduction for non-cash charitable contributions

For non-cash charitable contributions over $500, no deduction is allowed unless the taxpayer completes Form 8283 (Noncash Charitable Contributions). If the taxpayer is contributing a single item of clothing or any household item worth more than $500, an appraisal (see below) is required unless the property is in good condition or better. If the property is not in good condition or better, the taxpayer can still claim the deduction if an appraisal is obtained. 

Except for donations of publicly traded securities, all donations of property valued over $5,000 require a qualified appraisal that must be filed with the return. The appraisal must be performed by a qualified appraiser who is not the taxpayer, charitable organization, any person from whom the property was acquired, or certain related individuals or entities. Such appraisals, in addition to other requirements, must be made no earlier than 60 days prior to the day of the contribution and no later than the due date of the tax return on which the contribution is first claimed.

Automobiles

For donations of automobiles worth more than $500, the taxpayer must include an acknowledgement from the charitable organization with the return. With some exceptions, the amount of the deduction is equal to the lesser of the automobile’s fair market value on the date of the contribution or the gross proceeds received by the charitable organization from selling the automobile. The gross proceeds limitation does not apply if the organization improves the automobile, uses the automobile, or gives/sells the automobile to someone below fair market value in furtherance of the organization’s purpose of helping the poor.

Art

For donations of art valued at more than $50,000, the taxpayer may request a “Statement of Value” (SOV) from the IRS. Obtaining an SOV is basically an advanced ruling that the IRS will accept the appraised value of the art for valuing the charitable contribution or will require the value to be adjusted. The request for a SOV must include a copy of the appraisal, the completed appraisal summary, and the user fee ($7,500 for the first three pieces of art, and $400 for each additional piece of art).

What are some tax planning strategies using the charitable contribution deduction?

Since the standard deduction was almost doubled in 2018, only about 10% of taxpayers are itemizing, which means that almost 90% of taxpayers are not benefiting from the charitable contribution deduction. The following options allow taxpayers to take advantage of the deduction and reduce their tax burden.

Bunching (or bundling)

One simple tax strategy that can help taxpayers benefit from deducting their charitable contributions is called bunching (or bundling). 

Under bunching, a taxpayer consolidates their charitable donations for two or more years into one tax year. For the bunched year, the taxpayer itemizes (because their itemized expenses should exceed their standard deduction), while taking the standard deduction in all other years. If bunching is utilized by consolidating only two years, the contributions may not even be significantly delayed. For example, instead of making the donation in December, the taxpayer can simply move it to early January of the following year.

Donor-advised fund

Taxpayers may want to increase the overall value of their charitable contributions by investing assets and delaying the contributions to future years. One strategy that can accomplish this goal is using a donor-advised fund (DAF). A DAF is basically a charitable investment account for the sole purpose of supporting charitable organizations the taxpayer desires. The taxpayer contributes cash, securities, or other assets to the account that are eligible for an immediate charitable contribution deduction. The assets are then invested, and the related income is earned tax-free. 

To qualify, the DAF must be established with a public charity, and such charity must provide a contemporaneous, written acknowledgement substantiating the contribution. Most large investment firms (e.g., see Fidelity Charitable) have established public charities to administer DAFs. However, one potential downfall to DAFs is that the taxpayer does not retain ultimate control over which organizations receive the money. The taxpayer can only suggest to the public charity which organizations receive the money. However, for practical purposes, the suggestions are almost always followed.

Using an IRA

Lastly, taxpayers who are age 70 ½ or older can use their Individual Retirement Account (IRA) to increase the tax savings from charitable contributions. Under this strategy, the taxpayer can make tax-free distributions of up to $100,000 per year to public charities directly from their IRA. 

These contributions are not subject to any of the AGI limitations discussed above because they are neither included as gross income nor deducted on the taxpayer’s income tax return. Moreover, these contributions can satisfy the taxpayer’s annual required minimum distribution (if applicable). On the other hand, this strategy cannot be used if the taxpayer has a 401(k) or similar plan, but in this event, the taxpayer may be able to rollover money from their 401(k) to an IRA and subsequently make the distribution from the IRA. 

Learn more about the tax deductions and planning with Becker CPE

If you'd like to learn more about the charitable contribution deduction or other itemized deductions on the 1040 Schedule A, Becker has CPE courses that can teach you what you need to know. Check out the following courses to take the next step: 

• An Introduction to Charitable Conservation Contributions
• Individual Taxation Deductions and Credits (2024 Returns)
• Individual Taxation: Income and Deductions (2024 Returns)

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