“How much tax will I save?” Although taxpayers have philanthropic intent, the incentive to make charitable contributions is often impacted by the tax savings from the itemized deduction. The rules related to donations tend to change with each new tax law. This article will summarize the general rules including substantiation requirements and explain the changes for 2022 tax returns due to recent legislation.
Taxpayers may deduct charitable contributions if they itemize their deductions on Form 1040, Schedule A. The taxpayer must make a voluntary payment and cannot receive anything of value in return for the donation. If there is a benefit, the deductible amount of the donation is only the amount that exceeds the value of the benefit received. Purchases of raffle tickets or payments to civic leagues, social clubs and most foreign organizations do not qualify as deductible contributions. Taxpayers also cannot deduct the value of their time or services.
Depending on the type of donation a charitable deduction is limited to a certain percentage of the taxpayer’s adjusted gross income (AGI), either 60, 50, 30 or 20 percent (there was a modification to this rule for 2020 and 2021 which has now expired and does not apply to 2022 tax returns). This means that if the contribution exceeds this percentage of AGI, then the taxpayer has a carryover to a future year. There are special rules for carryovers and generally the excess contributions can be carried forward to each of the five succeeding years. Carryover contributions are subject to the original percentage limits in the carryover years and are deducted after deducting allowable contributions for the current year.
A 60 percent AGI limitation applies when the taxpayer:
- Makes a cash donation to a publicly supported charity or foundation that qualifies as a 50 percent limit organization. The definition of 50 percent limit organizations includes churches, educational organizations, hospitals, medical research organizations, publicly supported organizations that receive a substantial amount of support from the general public or governmental units, and private operating foundations.
A taxpayer may contribute property to a qualified organization. The amount of the deduction is generally the fair market value at the time of the contribution. There are special rules depending on the type of the property donated.
A 50 percent AGI limitation applies when the taxpayer:
- Donates property (other than capital gain property) to a publicly supported charity or foundation qualifying as a 50 percent limit organization. Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gains.
A 30 percent AGI limitation applies when the taxpayer:
- Donates capital gain property to a 50 percent limit organization (with an exception that the 30 percent limitation would not apply if the taxpayer limited the deduction to the cost basis of the property rather than the fair market value) OR
- Donates cash or property (other than capital gain property) to qualified organizations other than 50 percent limit organizations which include veteran’s organizations, fraternal societies, nonprofit cemeteries, and certain private non-operating foundations.
There is a win-win situation when taxpayers donate appreciated stock. Generally, they receive a charitable deduction at fair market value and they do not pay capital gain tax on the appreciation.
A 20 percent AGI limitation applies when the taxpayer:
- Donates capital gain property to any qualified organization other than a 50 percent limit organization. There is an ordering rule for applying the various AGI limitations. There is a worksheet in IRS Publication 526 to determine these rules.
Many taxpayers use a donor-advised fund. This is a separately identified fund or account that is maintained and operated by an IRC section 501(c)(3) organization which is called a sponsoring organization. The taxpayer receives a deduction for the contribution into the fund and then advises how to distribute amounts to charities. When a taxpayer donates cash to a donor-advised fund, it is subject to the 60 percent AGI limitation. If appreciated stock is donated to a donor-advised fund, it falls under the 30 percent AGI limitation.
Standard Deduction or Itemized Deductions
Taxpayers deduct the higher of the standard deduction or itemized deductions. Under the Tax Cuts and Jobs Act (enacted at the end of 2017), the standard deduction was raised for the years 2018 to 2025. For 2022, the standard deduction is $12,950 for single taxpayers and $25,900 for the married filing joint status. For 2023, these amounts will increase to $13,850 and $27,700, respectively. Taxpayers need deductions over this amount to itemize. One strategy to itemize deductions in one year is for the taxpayer to pool or front-load charitable contributions to exceed the standard deduction. A single taxpayer who typically donates $2,000 per year could donate $8,000 in year one and then make no contributions the next three years. With other deductions of state and local income taxes and mortgage interest expense, the front-loaded donations could push the taxpayer over the standard deduction. For the next three years the standard deduction would then be used. Here, donor-advised funds have been popular for making the contribution in the first year and then the taxpayer advises the funds to be paid to charity over the current year and the next three years.
Under Internal Revenue Code section 170, taxpayers must have substantiation for charitable contributions. For a cash donation, the taxpayer must have either a canceled check or bank account statement OR a written acknowledgment from the charity documenting the contribution’s amount and date.
If a donation is $250 or more in any one day to any one organization, there must be a written acknowledgment from the organization. The acknowledgement must state whether the charitable organization provided any goods or services in exchange for the contribution. When goods or services are provided, the charity must state the estimated fair market value.
Taxpayers need contemporaneous acknowledgments. The IRS requires written notice by the earlier of the date of filing or the due date of the return, including extensions.
More substantiation is required for noncash contributions, including:
- Name of the charitable organization
- Date and location of the contribution
- Reasonably detailed description of the contributed property
- Fair market value (FMV) of the property and method of valuation
- Cost or other basis of the property if FMV must be reduced.
Form 8283 is required to be filed if the donation of noncash property is in excess of $500. Additional information is required on this form if the contribution is over $5,000, including a written qualified appraisal, the declaration of a qualified appraiser, and a donee acknowledgment. However, the donation of publicly traded securities does not require an appraisal.
Changes from 2021 to 2022
There were two provisions of the CARES Act (enacted in 2020) which no longer apply to 2022. First, for those taxpayers who did not itemize their deductions in 2020 and 2021, there was a new $300 “above the line” (before AGI) deduction for cash contributions given to a qualified public charity. This “above the line” charitable deduction no longer exists in 2022.
Second, there was a 100% AGI limitation for cash charitable contributions made to a public charity in 2020 and 2021. This 100% AGI limitation no longer exists in 2022.
For many taxpayers there is a desire to donate to charity while benefiting from a tax deduction for the contribution. To plan for charitable giving, consideration must be given to the current IRS guidelines governing deductibility and substantiation. The tax advisors at Citrin Cooperman are available to help taxpayers maximize their charitable contributions: reach out to Kathy Garlow at email@example.com and Stephen Wessel at firstname.lastname@example.org.
Our specialists are here to help.
Get in touch with a specialist in your industry today.