Are you feeling generous during this holiday season? If so, you may be inclined to increase your charitable gift-giving at the end of the year. Generally, you can reap some tax rewards for your benevolence, but you must contend with several special rules.
Notably, you can claim deductions for charitable donations only if you itemize instead of taking the standard deduction on your personal return. Due to a myriad of changes in the Tax Cuts and Jobs Act (TCJA, effective from 2018 through 2025, more people are opting for the standard deduction. So that’s a key consideration. (A limited $300-per-taxpayer deduction for non-itemizers is no longer available.)
Practical advice: Figure out if you will be itemizing in 2023. This could affect the pattern of your gift-giving at year-end. For instance, you should generally “bunch” larger gifts in a year they will do you the most tax good—either 2023 or 2024. In addition, other tax law limits for charitable donations may come into play.
For starters, a taxpayer can often deduct the full amount of cash or cash-equivalent contributions made to charity, as long as strict substantiation requirements are met.
However, the total annual deduction for these monetary contributions is currently limited to 60% of your adjusted gross income (AGI). Any excess may be carried forward for up to five years.
Now suppose that you donate property instead of cash to a charity. This is where things get really tricky.
Here’s why: Usually, for donations of long-term capital gain property, you can deduct the property’s full fair market value (FMV). This rule applies to property that would have produced a long-term capital gain if you had sold it instead of donating it (i.e., property you have owned for more than one year). There’s no tax on the appreciation in value—ever.
However, if long-term capital gain property is donated to a charity, the deduction is generally limited to 30% of your AGI. If your charitable donations of property exceed the 30%-of-AGI limit for the current year, the excess may be carried forward for up to five years.
Is that the end of the story? Not quite. When you donate property to charity, it must be used to further the charity’s tax-exempt mission. For instance, if you’re donating artwork to a museum, make sure it is displayed. Otherwise, your deduction is limited to your basis in the property, regardless of how long you’ve owned it. In other words, you can’t deduct its FMV even if it qualifies as long-term capital gain property.
Finally, be aware that a charitable donation charged by credit card in late December is still deductible in 2023, subject to the rules and limits discussed above, even if you don’t actually pay off the credit card charge until 2024. Keep this tax break in your hip pocket as the year winds down.