Charitable Donation: Definition, Examples, Tax Deduction Rules

What Is a Charitable Donation?

A charitable donation is a gift of cash or property made to a nonprofit organization to help it accomplish its goals, for which the donor receives nothing of value in return. In the U.S., donations can be deducted from the federal tax returns of individuals and companies making them.

U.S. taxpayers are able to deduct donations equal to up to 60% of their adjusted gross income (AGI) annually. They must use Form 1040 or Form 1040-SR and itemize their deductible contributions on a Schedule A form.

Rules for Charitable Giving

The Internal Revenue Service (IRS) restricts the types of donations that can be made and the types of organizations that can receive them. In order to deduct charitable contributions, the recipient charity must be a qualified organization in the eyes of the IRS. Acceptable charities include:

• A trust, community chest, or foundation created in the United States that is operated exclusively for charitable, religious, scientific, literary, or educational purposes
• "Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements."
  
• A U.S. organization developed to prevent cruelty to animals or children
• A synagogue, mosque, church, or other religious organization
• A volunteer nonprofit fire company
• A veterans of war organization
• A civil defense organization created under local, state, or federal law, including any unreimbursed expenses of civil defense volunteers that are directly connected to their volunteer services
• A domestic fraternal society that functions under a lodge system (only deductible if the donation is used for charitable purposes)
• A nonprofit cemetery (only deductible if the funds are used to care for the cemetery as a whole versus a particular tombstone, mausoleum, crypt, or another marker)

Gifts given directly to individuals, even if done as acts of charity, do not qualify as tax-deductible charitable donations.

Is Your Whole Gift Deductible?

As part of their fundraising efforts, charitable and nonprofit organizations frequently offer some service or benefit in return for donations. This might be branded merchandise, tickets to an event, or a year’s free entrance to a museum. Only the amount of the donation that exceeds the fair market value of the received benefit can be deducted.

In other words, if the tickets to a charity baseball event are priced the same as a standard ticket to a game, that expenditure could not be deducted. If the tickets were priced at a premium, with the remainder going to the charity, that remainder portion of the expenditure could be claimed as a charitable donation.

Non-Cash Donations

Cash gifts aren’t the only kind of tax-deductible donation. Any property donated to a nonprofit organization can be deducted at fair market value. However, items such as works of art or investments that have appreciated in value may be subject to additional rules for deducting the donation. Non-cash property donations that are worth more than $5,000, for example, require an appraisal of the property that affirms its value.

You can also donate certain expenses that you incur while volunteering for a qualified charitable organization. Your expenditures must be, as the IRS puts it, “unreimbursed; directly connected with the services; expenses you had only because of the services you gave; and not personal, living, or family expenses.”

Charitable gift limits

Deductions for cash contributions are limited to 60% of your AGI. Non-cash contributions can be limited to 50%, 30%, or 20% of your AGI, depending on the type of property and organization receiving your donation. Capital gains property donations, such as appreciated stock, for example, are limited to 30% of your AGI.

How To Claim Charitable Donations on Your Taxes

If you intend to claim deductions for your charitable contributions, keep a record of each donation. This is required for donations of $250 or more. For donations that are less than $250, the IRS requires that you keep canceled checks or other records. A receipt or any written communication from the charity that cites the amount donated, the date, and the name of the organization will do.

The Bottom Line

Taxpayers can deduct cash contributions of up to 60% of their adjusted gross incomes on their taxes. In order to do this, they must itemize their income tax deductions on Schedule A. Deductible non-cash contributions can be limited to lower amounts, depending on the type of donation.

Check the rules carefully and make sure that you keep detailed records to document each charitable donation that you claim on your taxes.