Maximum Deduction for Charitable Contributions
The federal government knows that many charities would be forced to shut down if taxpayers had no incentive to make donations. But there are in fact limitations to the government's generosity. Although the limitations are relatively high for your charitable contributions, at some point, the IRS has to ensure that the charitable deduction does not allow you to eliminate your income tax entirely.
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Types of Charities
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Sometimes choosing one charity to receive your donation over another can increase the deductible amount of your contribution. Donations to certain charities the IRS classifies as "50-percent-limit" organizations have higher annual limitations. These donations allow you to claim a deduction up to an amount equal to 50 percent of your Adjusted Gross Income. If not, your deduction is limited to 30 percent of your AGI. You can easily find out which organizations qualify for the higher limitation by referring the Publication 78 on the IRS website.
Ordinary Income Property
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Adjustments that limit the amount of your deduction are necessary when you donate ordinary-income property. This is property that has increased in value since its initial purchase and that would result in taxable income to you if sold at fair market value. Essentially, this includes all property you own for a year or less. For example, if you purchase a stock for $10 and donate it five days later when it's worth $20, a sale would require you to pay ordinary income tax on the $10 gain. For this type of property, no complex calculation is necessary; however, you can only claim a deduction equal to the amount of your cost rather than its value on the date of donation.
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Capital Gain Property
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Capital-gain property is everything you own that is not ordinary-income property. In other words, it includes any piece of property you own for more than one year. That same share of stock you purchase for $10 can also be considered capital-gain property if you donate it more than a year after you purchase it. You can use the fair market value of this property to calculate your deduction, but the total value of capital-gain property you donate during the year cannot exceed 20 percent of your AGI. However, if you donate the property to a "50-percent-limit" organization, the limitation increases to 50 percent of AGI if you use cost rather than value as the basis for calculating your deduction; otherwise, you are limited to 30 percent.
Itemizing Deductions
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One thing to keep in mind before you start organizing your donations for the year is that a charitable contribution deduction is only available if you are eligible to itemize deductions. You are eligible to itemize when your deductible expenses for the year, including charitable contributions, exceed the standard deduction amount for your filing status.
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