Although most charitable donors aren’t primarily motivated by potential tax breaks, they still need to know how donations affect their taxes. It’s important for your not-for-profit to educate them — particularly as tax laws change. For example, in 2020 and 2021, even nonitemizers were allowed to deduct up to $300 and itemizers could deduct cash gifts up to 100% of their adjusted gross income (AGI).
These breaks have lapsed and aren’t available for 2022, unless Congress acts. The following summarizes laws that continue to affect donors.
Cash and certain property donations
Generally, donors who itemize can deduct total cash contributions up to 60% of their AGI. To be deductible, cash gifts under $250 must be supported by a bank record (such as a canceled check or credit card statement) or receipt (such as a thank-you letter from your nonprofit showing the date and amount of the gift). Cash gifts of $250 or more must be substantiated by a contemporaneous written acknowledgment from your nonprofit.
Total donations of ordinary-income property usually are deductible up to 50% of the donor’s AGI but limited to the donor’s tax basis in the property (typically the purchase price). Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at fair market value (FMV) on the date of donation. Examples include stocks and bonds held for one year or less.
Capital gains property
Donors of capital gains property usually can deduct the property’s FMV, but a lower AGI limit of 30% applies. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property is deductible.
If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting), the deduction is limited to the donor’s basis in the property.
For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth less than $250, a receipt is sufficient. However, for gifts:
Of $250–$500 in value, the donor must have a contemporaneous written acknowledgment from your nonprofit.
Of $501–$5,000 in value, the donor must also file Form 8283.
Of more than $5,000 in value, the donor must also obtain a qualified appraisal.
In general, only donations of the full ownership interest in property are deductible. The right to use property usually is considered a contribution of less than the donor’s entire interest in the property.
What isn’t deductible
Finally, make sure donors understand they can’t claim a deduction for the donation of their professional services. Related out-of-pocket costs, such as supplies and miles driven, on the other hand, are deductible as charitable contributions. Contact us for tax advice if you’re working with a donor making a major gift or complicated donation.