Many taxpayers make some kind of charitable contribution during the year that is tax deductible. However, there are limitations that can effectively reduce the amount you can deduct in the current year. As a result, becoming familiar with these limitations can help you plan when and how much you should donate.
Fair Market Value
The first type of limitation you may encounter before you even claim your deduction relates to your donation’s fair market value. When you donate property, the amount of your deduction cannot be more than what it’s worth. In some cases though, you may not even get to deduct the full value. This commonly occurs when you donate a used vehicle to a charity. If the charity decides to sell the car, your deduction is limited to the amount it obtains from the sale, even if it’s below fair market value.
In some cases when your donation otherwise qualifies for a full tax deduction, you may need to reduce the amount you claim when you receive something back from the organization in appreciation of your donation. For example, if you donate a used car and the charity gives you a $100 gift certificate to a local restaurant, you must reduce your deduction by $100. And even if the charity provides you with free access to its gym for a year, you must still estimate its value and reduce your deduction accordingly.
Once you determine the correct value for your donation and reduce it for any benefit you receive, more limitations still await you. The IRS limits the aggregate total you can deduct in a year to an amount equal to 30 percent of your Adjusted Gross Income (AGI). However, if you make your donation to a charity that the IRS deems a “50-percent-limit” organization, then the limitation is increased to 50 percent of your AGI. Since these limitations are based on your individual income, most taxpayers would have to make substantial donations during the year to be subject to this limitation. If the limitation does apply, you can deduct the excess during the next five tax years.
If you donate property that increases in value since its original purchase, and selling it would result in a short-term capital gain, then other limitations on your deduction will apply. When you donate this type of property, you can only deduct what you pay for it rather than its fair market value. For example, if you purchased stock last month for $10 per share and decide to donate it today when it’s trading at $15 per share, your deduction is limited to $10 per share. The theory behind this limitation is that $5 represents your taxable gain that the IRS expects you to pay tax on. In this case, depending on your tax rate, you may be better off selling the stock, paying the appropriate tax, and then donating the net proceeds to the charity.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.