Beware of Charitable Deduction Pitfalls (2024)

Special rules may limit annual deductions

When you make a donation to a qualified charitable organization, you probably think you can write off the full amount of the contribution, no questions asked. In fact, you might not even give the matter a second thought. But the tax rules for charitable deductions are fraught with perils, including numerous limitations and special restrictions.

It is important to know and understand the rules relating to charitable deductions before you start giving your money or property away. This could have an impact on your gift-giving decisions.

Background: Generally, a taxpayer can deduct the full amount of cash or cash-equivalent contributions made to charity, as long as strict substantiation requirements are met. But there are limits depending on whether you donate the funds to a “50% charity” or a “30% charity.”

As the name implies, the total deduction for gifts to 50% charities cannot exceed 50% of a taxpayer’s adjusted gross income (AGI). Accordingly, donations to 30% charities are limited to 30% of AGI. The list of 50% charities includes most religious groups, schools, hospitals and public charitable organizations, while certain other organizations—such as veterans associations and fraternal organizations—have been designated as 30% charities.

Suppose you donate property instead of cash to a charity. This is where things become more complicated. Usually, for donations of long-term capital gain property, you can deduct the property’s full fair market value (FMV). This rule applies to property that would have produced a long-term capital gain (i.e., property you have owned for more than one year) had you sold it instead of donating it. There is no tax on the appreciation in value.

If long-term capital gain property is donated to a 50% charity, the deduction is limited to 30% of AGI. However, if long-term capital gain property is donated to a 30% charity, the deduction cannot exceed 20% of AGI. When your charitable donations exceed either of these limits for the current year, the excess may be carried forward for up to five years.

Other special rules may come into play. For example, when you donate property to charity, it must be used to further the charity’s tax-exempt cause. Otherwise, your deduction is limited to your basis in the property. In other words, you cannot deduct its FMV, even if it qualifies as long-term capital gain property.

Finally, the “Pease rule” may cause another complication. This rule was gradually phased out during the last decade before being reinstated in 2013. Under the Pease rule, certain itemized deductions claimed by high-income taxpayers, including deductions for charitable donations, are reduced by 3% of AGI above a specified income threshold (but not by more than 80%). The threshold for 2014 is $254,200 of AGI for single filers and $305,050 for joint filers.

Final words: It may be possible to maximize your charitable deductions with some astute tax planning. This is especially true as the end of the year approaches. If you have any questions regarding your situation, do not hesitate to seek professional assistance.