Charitable Contributions

Charitable contributions represent one of the most tested itemized deduction topics on the EA exam. The rules involve multiple AGI limitations, various substantiation requirements, and special rules for different types of property donations.

Who Can Deduct Charitable Contributions?

Only taxpayers who itemize deductions on Schedule A can claim charitable contribution deductions. For 2024, this means total itemized deductions must exceed:

• $14,600 for Single or Married Filing Separately
• $29,200 for Married Filing Jointly or Qualifying Surviving Spouse
• $21,900 for Head of Household

Note: The special above-the-line deduction for charitable contributions that existed during COVID (2020-2021) has expired. For 2024, charitable deductions are only available to itemizers.

Qualified Organizations

Contributions are only deductible if made to qualified organizations. These include:

50% Limit Organizations (Public Charities):

• 501(c)(3) organizations - charitable, religious, educational, scientific, or literary organizations
• Churches, synagogues, mosques, and other religious organizations - automatically qualify without formal IRS recognition
• Federal, state, and local governments - when contributions are made exclusively for public purposes
• Public colleges and universities
• Hospitals and medical research organizations
• Donor-advised funds (subject to 60% cash limit)

30% Limit Organizations:

• Private non-operating foundations
• Veterans' organizations
• Fraternal societies (if used for charitable purposes)
• Nonprofit cemetery companies

Non-Deductible Contributions

The following are NOT deductible as charitable contributions:

AGI Limitations

The amount you can deduct is limited to a percentage of your AGI, depending on what you donate and to whom:

Important Rules:

1. Overall limit: Total deductions cannot exceed 50% of AGI in any single year
2. Apply limits in order: 60% then 50% then 30% then 20%
3. Excess contributions carry forward 5 years
4. Use FIFO (first-in, first-out) for carryovers

Example: A taxpayer with $100,000 AGI donates $70,000 cash to their church (60% org). The deduction is limited to $60,000 (60% x $100,000). The remaining $10,000 carries forward for up to 5 years.

Property Donations: FMV vs. Basis Rules

The deduction for donated property depends on the type of property and holding period:

Long-Term Capital Gain Property (held > 1 year):

• Generally deduct Fair Market Value (FMV)
• Subject to 30% AGI limit for public charities
• Can elect to deduct basis instead, which increases limit to 50%

Ordinary Income Property / Short-Term Capital Gain Property (held 1 year or less):

• Deduct the lesser of FMV or adjusted basis
• Includes: inventory, artwork created by donor, short-term stocks

Depreciated Property (FMV < Basis):

• Deduct FMV only - cannot deduct a loss

Tangible Personal Property - Special Rule:

• If charity's use is related to exempt purpose: deduct FMV
• If charity's use is unrelated to exempt purpose: deduct basis
• Example: Artwork donated to a museum (related use) vs. artwork donated to homeless shelter for auction (unrelated use)

Vehicles, Boats, Aircraft (over $500):

• If charity sells the vehicle: deduction limited to gross sales proceeds
• If charity uses the vehicle: may deduct FMV
• Requires Form 1098-C from charity within 30 days

Substantiation Requirements

The IRS has strict documentation requirements that escalate with the contribution amount:

Written Acknowledgment Must Include:

1. Amount of cash and description of property
2. Whether charity provided goods/services in return
3. Good faith estimate of value of goods/services provided (or statement of intangible religious benefit)

Timing: Acknowledgment must be obtained by the earlier of:

• Date tax return is filed, OR
• Due date (including extensions) for filing

Appraisal Requirements (for > $5,000):

• Must be qualified appraiser (not the donor, donee, or party to the transaction)
• Appraisal made no earlier than 60 days before donation
• Appraisal received no later than return due date (including extensions)
• Exceptions: publicly traded securities, inventory, vehicles sold by charity

Quid Pro Quo Contributions

When you receive something in return for your contribution, the deductible amount is reduced by the FMV of the benefit received.

Example: You pay $500 to attend a charity gala. The dinner has a FMV of $150. Your deductible contribution is $350 ($500 - $150).

Disclosure Requirement: Charities must provide written disclosure for quid pro quo contributions exceeding $75, including a good faith estimate of the goods/services value.

Token Exceptions (no reduction required):

• Benefits with insubstantial value (logo items costing charity $12.50 or less for contributions of $62.50 or more)
• Intangible religious benefits (masses, prayers)

Carryover of Excess Contributions

Contributions exceeding AGI limits can be carried forward for 5 years. The carryover maintains its original character (cash vs. capital gain property) and is subject to the same percentage limitations.

Order of Deduction:

1. Current year contributions first
2. Then carryovers in chronological order (FIFO)

Example: In Year 1, a taxpayer with $100,000 AGI donates $80,000 cash to a public charity. Deduction = $60,000 (60% limit). The $20,000 excess carries to Year 2. If AGI remains $100,000 in Year 2 with no new contributions, the taxpayer can deduct the $20,000 carryover.

Qualified Charitable Distributions (QCDs)

QCDs are a powerful tax strategy for older taxpayers:

Requirements:

• Taxpayer must be age 70-1/2 or older (not 73, despite RMD age change)
• Distribution made directly from IRA to qualified charity
• Cannot go to donor-advised funds or private foundations

2024 Limits:

• Maximum $105,000 per individual per year (inflation-adjusted)
• Married couples: $210,000 combined (each spouse must meet requirements)

Tax Benefits:

• Distribution is excluded from gross income (not reported as income)
• Counts toward Required Minimum Distribution (RMD) if applicable
• Provides tax benefit even if taxpayer takes standard deduction
• Reduces AGI (helping with Medicare premium phase-outs, Social Security taxation)

New Reduction Rule: QCDs must be reduced by any deductible IRA contributions made after age 70-1/2.

EA Exam Tips

Commonly Tested Concepts:

1. 60%/30%/20% limits - Know which applies to which situation
2. Cash vs. property - Different rules apply
3. Public charity vs. private foundation - Different limits
4. FMV vs. basis - When each applies for property donations
5. Substantiation thresholds - $250, $500, $5,000 are key numbers
6. QCD eligibility - Age 70-1/2, not 73

Watch for Traps:

• Donations to individuals are NEVER deductible
• Services/time cannot be deducted (only unreimbursed expenses)
• For appreciated property, the 30% limit applies even though 60% applies to cash
• QCDs require DIRECT payment to charity - cannot go through donor first

Quick Memory Aid: "Sixty-Thirty-Twenty" - Cash to public = 60%, Property or private = 30%, Property to private foundations = 20%