13.2 Charitable Contributions (Cash, Property, Percentage Limits) & Disaster Casualty Losses

Charitable Contributions Overview (IRC §170)

Under IRC §170, individual taxpayers may claim an itemized deduction on Schedule A (Form 1040), Lines 11–14 for contributions of cash or property made to or for the use of qualified organizations. To be deductible, contributions must meet three foundational criteria: (1) made to a qualified recipient, (2) verified by strict substantiation, and (3) within annual statutory Adjusted Gross Income (AGI) percentage limitations.

Qualified vs. Non-Qualified Donees

• Qualified Donee Organizations: 501(c)(3) religious, charitable, educational, scientific, or literary organizations; volunteer fire departments; civil defense organizations; veterans' posts organized under U.S. law; and federal, state, or local governments if the gift is made exclusively for public purposes.
• Non-Qualifying Donees (Zero Deduction): Direct gifts to individuals (regardless of need or hardship, including personal GoFundMe campaigns); foreign charities (except under specific tax treaties with Canada, Mexico, and Israel); political parties, campaigns, candidates, or political action committees (PACs); civic leagues, social clubs, chambers of commerce, and labor unions; and lottery or raffle tickets.

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Valuation Rules by Type of Donated Property

The tax deduction for a charitable gift depends fundamentally on whether the taxpayer donates cash, capital gain property, or ordinary income property.

1. Cash and Out-of-Pocket Volunteer Expenses

• Cash/Checks: Deductible at face dollar value.
• Volunteer Out-of-Pocket Expenses: Unreimbursed expenses directly incurred while volunteering for a qualified charity (uniforms, supplies) are deductible. Charitable travel mileage is deductible at the statutory rate of 14¢ per mile (IRC §170(i)), plus tolls and parking.
• Value of Services Trap: The value of a taxpayer's personal time, labor, professional services, or blood donations is strictly nondeductible ($0).

2. Capital Gain Property (Long-Term Capital Assets)

Capital gain property is any asset that, if sold at fair market value on the date of contribution, would have generated a long-term capital gain (held more than one year). Examples include appreciated stocks, mutual funds, real estate, and works of art.

• General Rule (Public Charities): The taxpayer deducts the full Fair Market Value (FMV) of the asset on the date of contribution. The taxpayer pays $0 capital gains tax on the untaxed appreciation!
• The Unrelated Use Rule (Tangible Personal Property): If the charity's use of tangible personal property (art, antiques, equipment) is unrelated to its exempt educational or charitable purpose (e.g., donating an antique sculpture to a hospital that immediately sells it to raise cash), the deduction is reduced by the long-term capital gain, effectively limiting the deduction to the donor's adjusted basis.

3. Ordinary Income Property

Ordinary income property is property that, if sold, would generate ordinary income or short-term capital gain (assets held one year or less, business inventory, depreciable property subject to recapture under §1245/§1250, and works of art created by the donor).

• Deduction Formula: Deductible at the Lesser of Fair Market Value (FMV) or Adjusted Basis.
• Artist/Author Rule: An artist who donates their own painting can deduct only the cost of canvas and paint (basis), not the retail gallery value.

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2025 AGI Percentage Limitations & 5-Year Carryforward

Charitable deductions claimed in any single tax year cannot exceed statutory percentages of the taxpayer's Adjusted Gross Income (AGI):

Statutory Ordering & 5-Year Carryforward Rules

• Ordering Priority: When a taxpayer makes multiple types of contributions in a single year, deductions are absorbed against AGI in a specific hierarchy: 60% cash contributions are taken first, then 50% property contributions, then 30% capital gain property contributions.
• 2026 Changes to Watch: OBBBA adds a charitable deduction for non-itemizers ($1,000 single / $2,000 MFJ of cash gifts) and a 0.5%-of-AGI floor on itemized charitable deductions, both starting in 2026. Neither applies to 2025 returns.
• 5-Year Carryforward: Contributions exceeding the annual AGI percentage limitations are not lost. They carry forward for up to 5 succeeding tax years. In carryforward years, current-year contributions are deducted first, and carryovers are applied under a first-in, first-out (FIFO) ordering rule subject to the same percentage caps.

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Substantiation & Documentation Mandates (IRC §170(f))

The IRS strictly enforces statutory substantiation rules. Lack of proper documentation will result in total disallowance of the deduction upon audit.

1. Cash Gifts of Any Amount

The taxpayer must maintain a bank record (canceled check, bank or credit card statement showing donee name and date) or a written receipt from the charity. Cash dropped in a collection bucket with no record is 100% nondeductible.

2. Contributions of $250 or More (The CWA Rule)

Under IRC §170(f)(8), for any separate contribution of $250 or more (cash or property), the taxpayer must obtain a Contemporaneous Written Acknowledgment (CWA) from the charity containing:

• The amount of cash and a description of any property contributed;
• An explicit statement whether the charity provided any goods or services in exchange for the gift;
• A description and good-faith estimate of the value of any goods or services provided.
• Timing Trap: The CWA must be in the taxpayer's hand on or before the date the return is filed (or the return due date including extensions). A canceled check alone is completely invalid substantiation for gifts of $250 or more!

3. Quid Pro Quo Contributions Exceeding $75

If a donor makes a payment exceeding $75 and receives goods or services in return (e.g., attending a charity fundraising banquet), the charity must provide a written disclosure statement stating that the deductible amount is limited to the excess of the payment over the FMV of goods or services received.

4. Noncash Reporting Thresholds (Form 8283)

• Total Noncash Gifts Over $500: Must attach Form 8283, Section A detailing donor basis, acquisition date, and valuation method.
• Total Noncash Items Over $5,000: Must obtain a formal Qualified Appraisal by an independent certified appraiser and complete Form 8283, Section B (signed by the appraiser and an authorized charity official). Exception: Publicly traded securities do not require an appraisal.
• Noncash Gifts Over $500,000: The taxpayer must attach the complete physical copy of the qualified appraisal to the tax return itself.

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Casualty and Theft Losses (IRC §165(h) & Form 4684)

Under IRC §165, individuals may claim an itemized deduction on Form 4684 (Casualties and Thefts) and Schedule A, Line 15 for personal property losses resulting from fire, storm, shipwreck, or other casualty, or from theft.

The TCJA Federally Declared Disaster Limitation

Under current federal tax law (IRC §165(h)(5)), personal casualty and theft losses are deductible ONLY IF the loss is attributable to a Federally Declared Disaster declared by the President of the United States under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

• The Gain Offset Exception: Personal casualty losses from non-disaster events (accidental fire, auto crash) are deductible only to the extent of personal casualty gains recognized during the year.

Step-by-Step Casualty Loss Computation

For each personal disaster casualty event, the deductible loss is calculated through a mandatory four-step hierarchy:

Step 1: Determine Decrease in Fair Market Value (FMV before casualty - FMV after casualty)
Step 2: Determine Adjusted Tax Basis of the Property
Step 3: Take the LESSER of Step 1 or Step 2
Step 4: Subtract Insurance Reimbursements and Salvage Value Received or Expected
        --> Result: Allowable Casualty Loss per Event
Step 5: Subtract Statutory $100 Floor per Casualty Event
Step 6: Aggregate all net disaster losses and subtract the 10% of AGI Floor
        --> Result: Allowable Schedule A Itemized Deduction

$\text{Deductible Loss} = \Big[ \sum (\text{Allowable Loss} - \$100) \Big] - (10\% \times \text{AGI})$

Qualified Disaster Losses: The Special Relief Regime

Separate, more generous rules apply to a qualified disaster loss. For 2025 returns, that means a loss from a major disaster declared between January 1, 2020 and September 2, 2025 whose incident period began between December 28, 2019 and July 4, 2025 and ended by August 3, 2025 (plus certain named earlier disasters). For these losses:

• The per-casualty floor is $500 instead of $100;
• The 10% of AGI floor does not apply; and
• A taxpayer who does not itemize may add the net qualified disaster loss to the standard deduction (entered on Schedule A, Line 16 with the standard deduction amount).

A disaster whose incident period began after July 4, 2025 is an ordinary federally declared disaster: the $100 and 10% floors apply, and the taxpayer must itemize.

Insurance Claim Prerequisite: If property is covered by insurance, the taxpayer must timely file an insurance claim. Under IRC §165(h)(4)(E), any loss that could have been covered by insurance but was not claimed cannot be deducted.

Section 165(i) Election for Disaster Losses (Prior-Year Relief)

Under IRC §165(i), a taxpayer who sustains a loss from a federally declared disaster can elect to deduct that loss on their federal income tax return for the tax year immediately PRECEDING the year in which the disaster occurred.

• Benefit: Enables the taxpayer to file an amended return (Form 1040-X) for the prior year and receive an immediate cash tax refund to help rebuild without waiting to file the current year's return.
• Deadline: The election must be made no later than 6 months after the regular due date (without extensions) for filing the return for the disaster year.