If you itemize your deductions, you can deduct donations to certain types of organizations from your taxable income. Although your maximum deduction is limited to a certain percentage of your adjusted gross income, if you file jointly with your spouse these limits apply to your combined adjusted gross income. If your donation kicks you into a lower tax bracket, your tax savings might even exceed the amount of your donation.
Section 501(c)(3) is the section of the Internal Revenue Code that determines which organizations may accept tax-deductible donations. In all cases the organization must be nonprofit. Generally, donations to certain organizations that are thought to serve beneficial social purposes are tax-deductible. Except for churches and governments, qualifying organizations must apply for and receive 501(c)(3) approval from the IRS before you may deduct your contributions. You may deduct cash gifts as well as the reasonable value of property. You cannot, however, deduct the value of time or services that you provide.
50 Percent Limit Donations
Generally, you may deduct annual donations of up to 50 percent of the combined adjusted gross income of you and your spouse to churches, hospitals, charities, educational institutions, state and tribal governments within the U.S., and organizations operated by and for the benefit of any of the foregoing organizations. The organization you donate to should be able to tell you what its donation limit is.
30 and 20 Percent Limit Donations
A 30 percent limit applies to donations to organizations that qualify under Section 501(c)(3) but are not 50 percent limit organizations. These organizations include veterans organizations, fraternal societies and nonprofit cemeteries. A 30 percent limit also applies to gifts for the use of organizations that would otherwise be subject to a 50 percent limit – a car given to a church for use by church personnel, for example. Additionally, a 30 percent limit applies to capital gain property that you donate to an organization otherwise subject to the 50 percent limit. Capital gain property is property you held for more than a year that appreciated in value while you owned it. A deduction limit of 20 percent of your AGI applies to donation of capital gain property to organizations otherwise subject to the 30 percent limit.
If your donation to a 501(c)(3) organization exceeds the applicable limit, you may carry over your excess for up to five tax years after the tax year in which you donated it. If you have carryovers from donations to different organizations subject to different deduction limits, the arithmetic gets more complex and is subject to special rules. You must, for example, subtract any carryover from donations to 50 percent limit organizations before deducting this year’s contributions to 30 percent and 20 percent limit organizations.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.