Many non-profit organizations could not survive if it wasn’t for the generosity of donors. To help these organizations obtain the necessary financing to continue providing services to local communities, the federal government gives taxpayers incentive to make donations with a charity tax deduction. But if you’re planning to eliminate your entire tax bill, you should know that there is a maximum charity deduction you can report.
Limitations Based On AGI
The maximum charity deduction you can take on a single tax return will depend on the amount of adjusted gross income you report, so it’s important to understand what your AGI is before doing any charitable tax planning. Your AGI is equal to total income minus the specific deductions listed in the “Adjusted Gross Income” section of your 1040 form. The type and maximum amount of each deduction may change each year, but the list commonly includes student loan interest payments, contributions to health savings and qualified retirement accounts, alimony payments and many others.
With the exception of certain donations you make to qualified conservation organizations, your total charitable deduction can never be more than 50 percent of your AGI. This is because the tax code identifies certain non-profit charities as “50-percent-limit organizations,” which tend to include the majority of organizations that are eligible to accept tax deductible donations, such as churches and educational institutions. When you make donations to charities that are 50-percent-limit organizations, they are fully deductible in the year made, provided your total deduction isn’t more than half of your AGI. For all other charities you make donations to that don’t qualify as a 50-percent-limit organization, the AGI limitation decreases to 30 percent.
Capital Gain Property
With a donation of appreciated property that would otherwise result in a capital gain if sold rather than donated, you can deduct the original cost or the higher fair market value. However, if you choose to deduct fair market value and the charity receiving the donation is a 50-percent-limit organization, the maximum deduction you can take in a single year for those donations cannot exceed 30 percent of your AGI. For all other organizations, the limitation on capital gain property donations is 20 percent of your AGI. For example, if you donate a portfolio of stocks that originally cost $2,000 but are worth $5,000 at the time you donate it to a 50-percent-limit charity, reporting a deduction of $2,000 is subject to the 50-percent limit, whereas a deduction of $5,000 is subject to the 30-percent limit.
Carrying Excess Forward
If the total value of all donations you make in a tax year exceed the applicable AGI limitation, the tax law does allow you to deduct the excess on one of your next five tax returns. The same AGI limitations that would apply in the year of the donation still apply to the excess donations that you carry forward, though other rules exist that dictate the order in which donations must be deducted -- which may not always be the same as the order in which the donations occured.