Charitable Donations: The Basics of Giving
November 6, 2013
- Charitable giving is a great way to support the causes you care about, as well as help reduce your tax burden.
- Ways to give back include in-kind donations, monetary gifts and volunteering.
While it may be better to give than to receive, with proper planning it's possible to do both at the same time. Consider the strategies below to help you make the greatest impact with your charitable donations while receiving some tax savings for yourself, too.
Ground rules for giving
The tax aspects of charitable giving can be complex, so it's a good idea to consult a tax professional about your personal giving strategy. That said, here are a few ground rules:
- Itemize deductions on your tax return if you plan to deduct charitable donations.
- Request a receipt if you make a donation of $250 or more to a single charity. Also, you'll need a receipt or a corroborating bank record for all cash donations, regardless of amount.
- Get an independent appraisal for gifts of property in excess of $5,000 ($10,000 for closely held stock). You won't need an appraisal for exchange-traded stocks, bonds or mutual funds.
- Subtract the value of any benefits you received for your charitable contribution (e.g., books, tapes, meals, entertainment and so on) before you deduct it.
Tax treatments by type of gift
Generally speaking, the tax advantages of a charitable contribution depend on three factors: the recipient (only donations to qualified charities are deductible), how you structure the gift and its form. Different types of charitable donations—cash, stock or personal property—offer different tax advantages and drawbacks.
Cash donations are simple and usually fully deductible. As previously mentioned, you will need a receipt from the charity or a bank record (such as a canceled check or statement) to substantiate your cash gift, no matter how small.
Tangible personal property
You can donate almost any item, including old clothing, household goods, or vehicles. Keep in mind that gifts of used clothing and household items must be in "good used condition or better."
If the property doesn't relate to the charity's mission, you may deduct the amount you paid for it or the property's current reasonable value, whichever is less.
If property is related to the charity's mission—old clothes donated to the Salvation Army, for example—it's usually fully deductible based on its current reasonable value. Many charities will provide some guidance on "thrift value," but it's ultimately up to you to determine the value of your donation for tax purposes.
Ordinary income property
You can donate property created by or used in a trade or business. This includes inventory held for sale—or, if you're an artist or craftsperson, items you created for sale. This category also covers property that, if sold, would generate ordinary income instead of long-term capital gains, such as investments held for one year or less.
Long-term capital gain property
You can usually deduct the full fair market value of appreciated long-term assets such as stocks, bonds or mutual funds you've held for more than one year. For example, the full fair market value of publicly traded securities is the average of the high-low price on the date of transfer. What's more, there's no capital gains tax.
A wrinkle here is that the deduction is limited to 30% of your adjusted gross income (AGI) instead of the usual 50% limit for donations of cash and short-term property made to public charities—though you can still carry forward unused deductions for five years.
If you choose to deduct your cost basis only, you can raise the limit to 50% of your AGI. But if you're holding securities with a loss, it's better to sell first, take the capital loss for tax purposes, and then donate the cash. Keep in mind, in most cases, donating appreciated securities can be a cost-effective way to benefit the charities of your choice.
Hypothetical example: donating cash vs. donating stock
You can sell your stock and then donate what's left over after you pay capital gains tax, or you can donate securities directly. But with the second option, you get a bigger deduction and the charity gets a bigger donation.
|Option 1: Sell stock and donate net proceeds||Option 2: Donate stock to a charity directly|
|Current fair market value of securities||1,000 shares × $100 per share = $100,000||1,000 shares × $100 per share = $100,000|
|Long-term capital gains tax paid or avoided1||$14,250 paid||$14,250 avoided|
|Amount donated to charity (cash or value of stock)||$85,750||$100,000|
|Personal income tax savings2 (0.28 × amount donated to charity)||$24,010||$28,000|
1. Assumes cost basis of $5,000, that the investment has been held for more than a year, and that all realized gains are subject to a 15% long-term capital gains tax rate. Does not take into account any state or local taxes.
2. Assumes donor is in the 28% federal income tax bracket, and does not take into account any state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with AGI above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI. For example, deductions for contributions of appreciated property to public charities generally are limited to 30% of the donor's AGI. Excess contributions may be carried forward for up to five years.
You can deduct transportation costs and other expenses related to volunteering. However, keep in mind, the value of volunteer time isn't deductible.
Limitation on itemized deductions
Starting in the 2013 tax year, the so-called Pease limitation on itemized deductions (named for the Congressman who first introduced it) is back in effect. Most itemized deductions, including charitable deductions, are reduced by 3% of AGI over $250,000 for single filers and $300,000 for married couples filing jointly (up to a maximum total of 80% of itemized deductions).
It's important to keep in mind that the Pease limitation is driven by your income, not the amount of your itemized deductions. Therefore, it should not be a disincentive for increased charitable giving.
More sophisticated giving options
If you want to make a longer-term commitment to giving, charitable remainder trusts (CRTs), pooled income funds, private foundations, and donor-advised funds all offer different benefits in terms of flexibility, taxes, administrative costs, and account minimums.
Open a donor-advised account with Schwab Charitable or call 800-746-6216 to learn more.
Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. The Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.
A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation. Consult your tax advisor for more information. The tax information herein is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified tax advisor or CPA.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.