Benefits for Charitable Giving
The income tax charitable deduction was introduced in 1917 and the estate tax charitable deduction in 1921. The charitable deduction depends on the asset(s) donated and the type of recipient (Toce, Abbin, Pace, and Vorsatz 2020). Donors claim the greater of the standard deduction and the sum of itemized deductions, including the charitable deduction. As a result, most taxpayers do not itemize in order to claim a charitable deduction. However, gifts of appreciated assets that are worth more at the time of the gift than when purchased (cost basis) escape capital gains tax if donated in‐kind to and sold by a charity.
The following summarizes the income tax benefits and annual limits of charitable gifts. The deduction is available for the year of the gift and up to five more years to carry‐over excess deduction each year.
Gifts to public charities by individuals:
Cash gifts: Limited to 60 percent of Adjusted Gross Income (AGI)/100 percent in 2020 and 2021.
Cash gifts in 2020 and 2021 also qualified for a universal above‐the‐line deduction of $300 single or $600 married (2021 only).
Long‐term noncash gifts: Limited to 30 percent of AGI for fair market value (FMV) or 50 percent for cost basis.
Short‐term noncash gifts: Limited to 50 percent of AGI for cost basis of the gift.
Ordinary income/Tangible property for unrelated use: Limited to 50 percent of AGI for cost basis of the gift.
Gifts to public charities by corporations:
Cash gifts: Limited to 10 percent of Taxable Income/25 percent in 2020 and 2021.
Gifts of food inventory for the needy: Limited to 15 percent of Taxable Income/25 percent in 2020 and 2021.
Gifts to private foundations by individuals:
Cash gifts: Limited to 30 percent of AGI.
Long‐term noncash gifts: 20 percent of AGI for fair market value (FMV) for public stock only/cost basis for other assets.
Short‐term noncash gifts: Limited to 30 percent of AGI for cost basis of the gift.
Ordinary income: Limited to 30 percent for cost basis of the gift.
Tangible property for unrelated use: Limited to 20 percent of AGI for cost basis of the gift.
Gift and Estate Tax Benefits for Charitable Giving
There are differences among the income, gift, and estate tax benefits for charitable giving. First, the gift and estate tax charitable deductions do not have percentage limits. Second, the income tax charitable deduction is only available for gifts to domestic organizations while the estate tax deduction is available to domestic and foreign organizations. (See IRC Section 2522(a).)
Noncash Gifts
To claim an income tax charitable deduction for a noncash gift (e.g., stock, real estate, artwork, equipment, software) the donor must complete IRS form 8283 (with an exception for gifts of small value), and file it with the tax return. A deduction over $5,000 requires a qualified and independent appraisal.
A resource for noncash gift valuation is IRS Publication 561, Determining the Value of Donated Property. If the charity sells or disposes of the noncash gift within three years, it must complete IRS Form 8282, reporting the sale except for gifts such as publicly traded stock. The IRS compares the sale price with the deduction value. An excellent resource that reviews the tax rules for various types of gifts is IRS Publication 526, Charitable Contributions.
Gifts to International Organizations
The legal aspects of international fundraising and the tax benefits for donors are complex. Since 9/11, several regulations, including lists of organizations linked to terrorism, were promulgated to assure that philanthropy was not assisting terrorist activities. In general, only gifts to charitable organizations created under the laws of the United States – or gifts subject to tax treaties between the United States and select countries (e.g., Canada, Mexico, Israel) – qualify for an income tax deduction. This rule does not apply to the estate tax charitable deduction.
To support international charities, various prudent procedures may be followed, including expenditure responsibility and equivalency determination. See www.guidestar.org and the U.S. Department of the Treasury website at www.treas.gov/offices/enforcement/key-issues/protecting/index.shtml.
Gift Substantiation and Disclosure
A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of the contribution. An organization can assist a donor by providing a timely, written statement containing the following information:
Name of organization.
Date of contribution.
Amount of cash contribution.
Description (but not the value) of noncash contribution.
Statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
For the written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of the date on which the donor files their individual federal income tax return for the year of the contribution or the due date (including extensions) of the return. The acknowledgment must describe goods or services an organization provides in exchange for a contribution of $75 or more. For a summary of the gift receipt rules, see IRS Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements.
Conclusion
Fundraising excellence requires adherence to both the letter and spirit of the law. Prudent management of charitable organizations requires careful attention to the “black and white” legal and ethical requirements for fundraising. It also requires making good – and sometimes difficult – decisions in cases where a dilemma is presented. Good decision‐making requires one to clarify the facts, understand the applicable legal and ethical standards, and make a reasonable decision. Evaluating and modifying one's decisions helps to continually improve fundraising practices. Achieving excellence in fundraising demands nothing less.
Discussion Questions
1 Explain
