Maximum Charitable Tax Deductions
The federal tax laws provide taxpayers with an opportunity to reduce their tax liability each year by allowing for the deduction of charitable contributions. Although the regulations provide minimal restrictions on the amount of donations you can claim a deduction for, there are annual taxpayer-specific maximums. These varying limitations can result in two taxpayers making identical contributions and only one being able to claim a deduction.
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Property Contributions
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The potential tax benefit of your charitable deduction directly relates to the fair market value of the property you donate. For example, if you donate a used vehicle, the condition of the car need not be in perfect running order; however, it must provide some value to the charity. An assessment of its value requires you to reference a reputable used-car price guide taking into account its year, make, model and the mechanical and body condition. The IRS will impose penalties if you inflate the value to obtain a larger deduction.
Annual Limitations
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The tax laws allow you to deduct all contributions you make in a year provided it does not exceed an amount equal to 30 percent of your Adjusted Gross Income. However, the annual limitation increases to 50 percent for contributions you make to charities that the IRS deems a "50-percent-limit organization." The IRS provides a comprehensive list of every organization that qualifies for the higher limitation. If you make donations to various organizations during the year, you must apply the limitations separately. For example, if you donate $10,000 in property to a 50-percent-limit organization and $10,000 to a charity subject to the 30 percent limitation in a year when your AGI is $20,000 you can deduct the full amount of the first donation, but only $6,000 of the second donation.
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Capital Gain Property
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A separate limitation applies to property you donate that would result in a long-term capital gain had you sold it for its fair market value rather than making a charitable contribution. For example, the IRS considers a piece of jewelry you purchase five years ago for $10,000 as a capital asset. Since you own it for more than one year, selling it in the current year for its fair market value of $20,000 would result in a long-term capital gain of $10,000. However, if you donate the jewelry to a qualified organization, a special 20 percent AGI limitation applies to the capital asset with inherent long-term gain. If the donation is to a 50-percent-limit organization, the AGI limitation increases to 30 percent when you deduct the $20,000 fair market value or 50 percent if you use its cost basis of $10,000.
Carryovers
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If one of the AGI limitations precludes you from deducting the full amount of all contributions you make in the current year, you can carry the excess forward. You must deduct all contributions over the next five years, exhausting the oldest carryover amounts before the more recent ones.
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