- How to receive a charitable tax deduction
- 1. How much do I need to give to charity to make a difference on my taxes?
- 2021 standard deductions
- 2. What can I take a tax deduction for?
- 3. What's the maximum amount I can claim as a charitable tax deduction on my taxes?
- 4. What do I need in order to claim a charitable contribution deduction?
- 5. Which tax bracket am I in and how does that impact my deductions?
- 2021 tax brackets (for taxes due April 15, 2022)
- Want more from Fidelity Charitable?
- 6. How does the Pease limitation affect my tax deduction?
- 7. Can I take a Fair Market Value deduction for donating private S-corp or C-corp stocks to charity?
- How Fidelity Charitable can help
- Charitable Contribution Deductions
- Temporary Increase in Limits on Contributions of Food Inventory
- Qualified Organizations
- Timing of Contributions
- Deductible Amounts
- Limitations on Deductions
- Foreign Organizations
- Reliance on Tax Exempt Organization Search
- Additional information:
- 4 Ways Charitable Giving Can Help Reduce Your 2020 Taxes
- 1. Make the most of cash
- 2. Consider appreciated non-cash assets for extra tax benefits
- 3. Take advantage of carryovers or bunching
- 4. Offset a taxable event
- What to do next
How to receive a charitable tax deduction
A basic guide to the potential tax implications (and advantages) of donating to charity
There's financial incentive for Americans to give generously to charity: when you donate to a 501(c)(3) public charity, including Fidelity Charitable, you are able to take an income tax charitable deduction. The purpose of charitable tax deductions are to reduce your taxable income and your tax bill—and in this case, improving the world while you’re at it.
1. How much do I need to give to charity to make a difference on my taxes?
Charitable contributions can only reduce your tax bill if you choose to itemize your taxes. Generally you'd itemize when the combined total of your anticipated deductions—including charitable gifts—add up to more than the standard deduction.
2021 standard deductions
|Married filing jointly||$25,100|
|Head of household||$18,800|
Keep track of your charitable contributions throughout the year, and consider any additional applicable deductions. Generally taxpayers use the larger deduction, standard or itemized, when it's time to file taxes.
2. What can I take a tax deduction for?
In order to take a tax deduction for a charitable contribution, you'll need to forgo the standard deduction in favor of itemized deductions. That means you'll list out all of your deductions, expecting that they'll add up to more than the standard deduction.
The most common expenses that qualify are:
- Mortgage interest
- State and local tax
- Charitable giving
- Medical and dental expenses
Looking for a tax-efficient way to give to your favorite charities?
When you contribute cash, securities or other assets to a donor-advised fund at a public charity, Fidelity Charitable, you are generally eligible to take an immediate tax deduction.
3. What's the maximum amount I can claim as a charitable tax deduction on my taxes?
When you make a charitable contribution of cash to a qualifying public charity, in 2021, under the Consolidated Appropriations Act1, you can deduct up to 100% of your adjusted gross income.
Learn more about what you can donate
4. What do I need in order to claim a charitable contribution deduction?
Once you've decided to give to charity, consider these steps if you plan to take your charitable deduction:
- Make sure the non-profit organization is a 501(c)(3) public charity or private foundation.
- Keep a record of the contribution (usually the tax receipt from the charity).
- If it's a non-cash donation, in some instances you must obtain a qualified appraisal to substantiate the value of the deduction you're claiming.
- With your paperwork ready, itemize your deductions and file your tax return.
5. Which tax bracket am I in and how does that impact my deductions?
Federal tax brackets are taxable income and filing status. Each taxpayer belongs to a designated tax bracket, but it’s a tiered system. For example, a portion of your income is taxed at 12%, the next portion is taxed at 22%, and so on.
This is referred to as the marginal tax rate, meaning the percentage of tax applied to your income for each tax bracket in which you qualify. In essence, the marginal tax rate is the percentage taken from your next dollar of taxable income above a pre-defined income threshold.
That means each taxpayer is technically in several income tax brackets, but the term “tax bracket” refers to your top tax rate.
2021 tax brackets (for taxes due April 15, 2022)
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6. How does the Pease limitation affect my tax deduction?
The Tax Cut and Jobs Act of 2017 removed the Pease limitation from the tax code. The Pease limitation was an overall reduction on itemized deductions for higher-income taxpayers.
The rule reduced the value of a taxpayer’s itemized deductions by 3% of adjusted gross income (AGI) over a certain threshold.
The 3% reduction continued until it phased out 80% of the value of the taxpayer’s itemized deductions.
7. Can I take a Fair Market Value deduction for donating private S-corp or C-corp stocks to charity?
Yes, it's possible to deduct the full fair market value of the contribution if the recipient organization is a public charity.
But tactically, the answer depends on whether the charity is able to accept private stock as a gift.
Most charitable organizations simply don’t have the resources, expertise or appetite to efficiently accept and liquidate these types of assets, particularly in a time crunch at the end of the year.
However, Fidelity Charitable has a team of in-house specialists who work with donors and their advisors to facilitate charitable donations of S-corp and private C-corp stock every day (among many other assets). Once you make a donation to Fidelity Charitable and the asset is sold, you’re able to recommend grants to your favorite charities, quickly and easily.
And by donating private stock, you generally do not pay capital gains taxes on Fidelity Charitable's subsequent sale of the stock. There's a second tax benefit as well: you'll generally be able to deduct the full FMV as determined by a qualified appraisal.
How Fidelity Charitable can help
Since 1991, we have been helping donors you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join more than a quarter million donors who choose Fidelity Charitable to make their giving simple and more effective.
Charitable Contribution Deductions
In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation.
Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year.
To qualify, the contribution must be:
- a cash contribution;
- made to a qualifying organization;
- made during the calendar year 2020
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
The Coronavirus Tax Relief and Economic Impact Payments page provides information about tax help for taxpayers, businesses, tax-exempt organizations and others – including health plans – affected by coronavirus (COVID-19).
Temporary Increase in Limits on Contributions of Food Inventory
There is a special rule allowing enhanced deductions by businesses for contributions of food inventory for the care of the ill, needy or infants.
The amount of charitable contributions of food inventory a business taxpayer can deduct under this rule is limited to a percentage (usually 15 percent) of the taxpayer’s aggregate net income or taxable income.
For contributions of food inventory in 2020, business taxpayers may deduct qualified contributions of up to 25 percent of their aggregate net income from all trades or businesses from which the contributions were made or up to 25 percent of their taxable income.
The Coronavirus Tax Relief and Economic Impact Payments page provides information about tax help for taxpayers, businesses, tax-exempt organizations and others – including health plans – affected by coronavirus (COVID-19).
This article generally explains the rules covering income tax deductions for charitable contributions by individuals.
You can find a more comprehensive discussion of these rules in Publication 526, Charitable Contributions PDF, and Publication 561, Determining the Value of Donated Property PDF.
For information about the substantiation and disclosure requirements for charitable contributions, see Publication 1771 PDF. You can obtain these publications free of charge by calling 800-829-3676.
You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases. Tax Exempt Organization Search uses deductibility status codes to identify these limitations.
You may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code:
- A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
- A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- A church, synagogue, or other religious organization;
- A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
- A nonprofit volunteer fire company;
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
Timing of Contributions
Contributions must actually be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.
If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made.
The rules relating to how to determine fair market value are discussed in Publication 561, Determining the Value of Donated Property PDF.
Limitations on Deductions
In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks.
Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however.
Tax Exempt Organization Search uses deductibility status codes to indicate these limitations.
The 50 percent limitation applies to (1) all public charities (code PC), (2) all private operating foundations (code POF), (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2-1/2 months following the year of receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.
The 30 percent limitation applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE).
A special limitation applies to certain gifts of long-term capital gain property. A discussion of that special limitation may be found in Publication 526, Charitable Contributions PDF.
The organizations listed in Tax Exempt Organization Search with foreign addresses are generally not foreign organizations but are domestically formed organizations carrying on activities in foreign countries. These organizations are treated the same as any other domestic organization with regard to deductibility limitations.
Certain organizations with Canadian addresses listed may be foreign organizations to which contributions are deductible only because of tax treaty. Besides being subject to the overall limits applicable to all your charitable contributions under U.S.
tax law, your charitable contributions to Canadian organizations are subject to the U.S. percentage limits on charitable contributions, applied to your Canadian source income.
A deduction for a contribution to a Canadian organization is not allowed if the contributor reports no taxable income from Canadian sources on the United States income tax return, as described in Publication 597 PDF.
Except as indicated above, contributions to a foreign organization are not deductible.
Reliance on Tax Exempt Organization Search
Revenue Procedure 2011-33, 2011-25 I.R.B.
887 describes the extent to which grantors and contributors may rely on the listing of an organization in electronic Publication 78 and the IRS Business Master File extract) in determining the deductibility of contributions to such organization. Grantors and contributors may continue to rely on the Pub.78 data contained in Tax Exempt Organization Search to the same extent provided for in Revenue Procedure 2011-33.
Similar reliance provisions apply to an organization's foundation classification as it appears in the list. See also Revenue Procedure 89-23 PDF.
- Pension Protection Act Revises EO Tax Rules
4 Ways Charitable Giving Can Help Reduce Your 2020 Taxes
November 24, 2020 7 min read Opinions expressed by Entrepreneur contributors are their own.
This year in the U.S., we’ve seen truly historic levels of charitable giving in support of communities impacted by the pandemic, social unrest and natural disasters.
Still, new research from the Lilly Family School of Philanthropy at Indiana University and funded by Schwab Charitable shows that many nonprofits are struggling with rising demand for their services at the same time funding has declined.
Many entrepreneurs and business owners are struggling, too, but for those who have the means, this year’s tax laws and election-year uncertainty may make it wise to be generous now.
Tax rules could change in 2021 with a new administration, but current annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 60% of adjusted gross income (AGI) for contributions of cash.
In addition, with the S&P 500® index currently trading at roughly twice the level of eight years ago, you may also want to consider donating non-cash assets, such as publicly traded stock, which have an annual AGI limit of 30%. For blended contributions of cash and non-cash assets, the limit is 50% of AGI.
Donation amounts in excess of these deduction limits may be carried over up to five tax years.
As you consider how to respond to these unprecedented times, four strategies are worth considering to help make your charitable giving both tax-smart and high-impact.
1. Make the most of cash
If you plan to take the standard deduction, the Coronavirus Aid, Relief and Economic Security (CARES) Act offers the option to claim a deduction of up to $300 for cash contributions to “operating charities.” The term is defined by Internal Revenue Code section 170(b)(1)(A) and does not include donor-advised funds, supporting organizations or private foundations.
Many sole proprietors and business owners of pass-through entities itemize deductions on their personal returns. In that case, the CARES Act also gives donors who itemize an option to elect a 100% of AGI deduction limit for cash donations to operating charities.
It is important to consult a tax advisor before electing the 100% of AGI deduction because the limit on cash contributions applies to federal income taxes and may not be honored by your state. It is also unclear whether combinations of cash and non-cash assets can be used to reach or exceed the 100% of AGI deduction limit.
In addition, there is uncertainty about whether taking the election when filing 2020 taxes will eliminate or reduce deductions for other charitable contributions.
2. Consider appreciated non-cash assets for extra tax benefits
If you itemize deductions, you can generally claim a deduction for the fair market value of an appreciated non-cash asset that you have held for more than one year before contributing to charity.
Donors also generally do not owe the capital gains tax they would pay if they sold the asset and donated the cash proceeds.
Commonly donated assets include publicly traded securities (such as stocks, exchange traded funds and mutual funds), restricted stock, and privately held business interests.
Image credit: Schwab Charitable
This hypothetical example is only for illustrative purposes and does account for state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor’s income tax rate (24% in this example), minus the long-term capital gains taxes paid.
3. Take advantage of carryovers or bunching
- Give beyond limits. Donors who itemize deductions may give more than the 60% AGI limit for cash and 30% AGI limit for non-cash assets in 2020, and then carry over the excess deduction for up to five years.
- Concentrate contributions.
If your total itemized deductions are a little less than the standard deduction, you may be able to have more charitable impact and a larger two-year deduction by concentrating, or bunching, 2020 and 2021 charitable contributions into one year (2020), and then itemizing deductions on your 2020 taxes. If you then take the standard deduction on your 2021 tax return, it may result in a larger deduction over the two years, compared to two separate years of itemized charitable deductions (depending on income level, tax filing status, and giving amounts each year).
4. Offset a taxable event
- Donate a portion of privately held business interests you plan to sell. If you are considering a sale of an interest in a privately held company (C-Corp, S-Corp, LP, LLC), donating a portion of your long-term held interest to a donor-advised fund or other public charity before the sale can help to reduce your tax burden.
Consult your tax and financial advisors to ensure you are considering all relevant requirements, which may include avoiding a pre-arranged sale, obtaining a qualified appraisal, applying SEC Rule 144, accounting for unrelated business income tax, or transfer restrictions.
- Lower taxes on equity compensation.
The most common forms of equity compensation awards are non-qualified stock options, incentive stock options, restricted stock units and restricted stock awards. The awards themselves are generally not transferable and therefore cannot be given to charity.
Once these awards are vested and/or exercised, a sale of the resulting stock may result in a large capital gains tax bill, because the awards often have a low cost basis.
In order to maximize tax benefits of contributing stock received from the vested and exercised equity compensation award, the stock should be held for the required holding period to qualify as long-term capital asset, which is generally more than one year from date of vesting and exercise.
For incentive stock options, stock must be held two years from grant date and more than one year from the date of exercise.
- Contribute IPO stock to charity. An initial public offering (IPO) may result in substantial capital gains taxes when the IPO stock is sold.
Donating a portion of your IPO stock — either during or after the lock-up period — to a donor-advised fund or other public charity may provide you with a current year, fair market value income tax deduction and potentially eliminate capital gains taxes.
The issuer’s counsel determines whether and how charitable gifts of IPO stock may be made during a lock-up period and a qualified appraisal may be required to substantiate fair market value.
- Use a charitable deduction to help offset the tax liability of a retirement account withdrawal or a Roth conversion. If you take withdrawals from a retirement plan account in 2020, you may be able to use charitable donations to help offset income tax on the withdrawals and reduce your taxable estate.Charitable deductions can also potentially offset taxes on the amount of a tax-deferred retirement account, such as a traditional IRA, that is converted to a Roth IRA.
What to do next
You may want to talk to your financial and/or tax advisor about ways to maximize your philanthropic impact and incorporate charitable planning into your overall plan. They can help guide you so that your charitable goals are funded right along with other financial objectives.
Here are a few potential starting points include the following:
- Explore charities recommended by the Center for Disaster Philanthropy for COVID-19 relief efforts
- Review this case study on the tax benefits of bunching charitable contributions
- See frequently asked questions on IRA rollovers and Roth conversions from the Internal Revenue Service
- Listen to Schwab Charitable’s Giving with Impact podcast, where you'll find leading voices from the charitable ecosystem who may help you become a more effective philanthropist
But, there are also plenty of resources and tools available online to help you with your philanthropic journey. You can find guidance on everything from defining a charitable mission to making tax-smart account contributions and researching charities to support.