Tips on Charitable Contributions: Limits and Tax Breaks

Gifts to charity are one of the best tax-saving opportunities available. Not only does the charity itself benefit, but the taxpayer receives a tax deduction, at least to a certain limit. As with most tax benefits, changes are made from time to time to those limits and other regulations, including some noted below that came into effect for 2019.

The ways you can contribute to charity, along with the limits and benefits of doing so, are varied and potentially confusing. Here's a rundown, beginning with who is eligible to receive and give while getting the benefits of the exchange.

Not all donations are eligible for deductions.

The recipient must be duly qualified. That rules out friends, relatives, and any other person or group who lacks tax-exempt status as determined by the U.S. Treasury.

The list of eligible entities includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Nonprofit veterans' organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations can also qualify. Even a donation to a federal, state, and local government may be eligible if the donated funds money are earmarked for charitable causes.

Not everyone is eligible to deduct.

In order to get the potential tax benefits, you must file IRS Form 1040 and itemize deductions on Schedule A to claim the charitable deduction.

Be aware that changes in tax law in effect as of 2019 make it less likely that it will make financial sense to itemize. The standard deduction has been raised, which increases the possibility that taxpayers may be better off opting to take it rather than to itemize. Further, the so-called SALT deduction for state and local taxes has been capped at $10,000, which also serves to make it more likely that those whose taxes exceeded that amount may opt against itemizing since they, too, may benefit more by simply taking the standard deduction.

If you do hope to deduct your contributions, it may pay to group them for maximum tax impact. For example, you could choose to donate in one year what you might have given over two years, then skip a year.

Some contributions gain only partial credit.

For certain donations, some calculation is required to determine the deduction you're entitled to claim. In the first such category are donations for which you receive at least a partial benefit. For example, if you buy a T-shirt "for a cause" the entire price of the shirt isn’t deductible, only whatever you contributed in excess of the value of the shirt. If you donated $40, say, and the stated value of the T-shirt is $20, the deductible amount of the gift is only $20 ($40 – the shirt's $20 value). (For more insight, read about how to maximize your tax deduction.)

Donated goods receive only their market value.

Many folks donate clothes, household items, and more to Goodwill, the Salvation Army, and similar charities. This is a great way to declutter and help others. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition; additional regulations apply to vehicle donations. You can’t claim the new value for a noncash donation, but must use the item’s fair market value. That price is similar to a thrift store value.

Some tax preparation programs include a calculator to help determine items’ value. When donating noncash charitable contributions, if your total deduction is greater than $500, you must file IRS Form 8283. Additionally, if you give cash or property worth more than $250, you need a written acknowledgment from the organization as well. IRS Publication 561 is a useful resource to help you decide the value of your noncash contributions.

Your generosity when giving may hit a ceiling when it comes to tax benefits. Here's an accounting of those limits and how they're applied.

There is a limit to the amount of all charitable contributions allowed during a tax year. Your total charitable deduction can’t exceed 50% of your adjusted gross income (AGI). However, only donations to certain organizations are allowed to hit that 50% milestone. These organizations include churches, educational institutions, hospitals, and others as defined by the IRS. (For more insight, explore the little-known tax deductions and credits.) Donations to certain qualified conservation contributions are also eligible for the higher limit.

A lower limit, of no more than 30% of your AGI, applies to other types of charitable groups. Among the categories to which this lower mark applies are veterans’ organizations, fraternal societies, nonprofit cemeteries, and certain private foundations.

Your word that you gave to a charity isn't good enough for the IRS. The taxpayer must keep detailed records to support the contributions. In order to claim a deduction for cash, you must have a written record, canceled check, letter from the organization, or bank/payroll debit. (For more insight, read about how to donate stock to a charity.)

Don’t let the rules and regulations deter you from claiming the charitable deduction. For specific guidance about what is and isn't allowed, download a copy of IRS publication 526 and Form 8283 (for noncash charitable donations) for easy reference. And to clarify any potential charity contribution limits, visit the www.irs.gov website.