Quick Guide: Charitable Tax Deductions

The following is for educational purposes only.  Please consult your tax professional when claiming charitable deductions.  

There’s a financial incentive for Americans to give generously to charity: when you donate to a 501(c)(3) public charity, including Virginia Academy and Community Church, you are able to take an income tax charitable deduction. The purpose of charitable tax deductions is to reduce your taxable income and your tax bill—and in this case, improve the world while you’re at it.  Did you know that Americans gave $499 billion to recognized charities in 2021. 

What is a Charitable Donation?

A charitable donation is a gift of cash, services or property made to a nonprofit organization to help it accomplish its goals, for which the donor receives nothing of value in return. In the U.S., donations can be deducted from the federal tax returns of individuals and companies making them.  Taxpayers may deduct charitable donations of up to 60% of their adjusted gross incomes.

In order to deduct charitable contributions, the recipient charity must be a qualified organization in the eyes of the IRS.  The Virginia Academy is a 501(c)(3) nonprofit organization as part of the Leesburg Pike Community Church.  Both the church and the school qualify as a charitable organization.

Gifts given directly to individuals, even if done as acts of charity, do not qualify as tax-deductible charitable donations.

How does the deduction work?

As part of their fundraising efforts, charitable and nonprofit organizations frequently offer some service or benefit in return for donations. This might be branded merchandise, tickets to an event, or a year’s free entrance to a museum. Only the amount of the donation that exceeds the fair market value of the received benefit can be deducted.

For example, if a donor’s marginal tax rate is 30 percent, a deductible one-dollar cash gift to charity will reduce the donor’s taxes by 30 cents, so the price of the gift to the donor will only be 70 cents while the charity receives 1 dollar. 

In another example, if a donor gave $50 dollars to a charity golf event and in return received a round of golf that is regularly priced at $50, that expenditure could not be deducted because the donor is receiving something of value in return. However, if the donor gave $250 to the same charitable event, the amount in excess of the round of golf ($200) could be claimed as a charitable contribution.  The donor may choose to deduct that $200 from his or her taxable income, thereby lowering the amount owed to the federal government.

In-kind donations: A “gift-in-kind” is a type of charitable giving in which contributions take the form of tangible goods rather than money — whether that be supplies, equipment and materials, or services and time.  Gifts-in-kind are recorded at fair market value, the price a product or service would sell for on the open market.  For example, if a law firm that usually charges $100 per hour for services  decides to donate 10 hours of legal services to a charity (and gets nothing in return), the firm can claim a $1,000 deduction. 

Stock and Equity donations:  Donating stocks and other equity positions directly to charity is one of the most tax-smart ways to give.  When you donate stock to charity, you’ll generally take a tax deduction for the full fair market value. And because you are donating stock, your contribution and tax deduction may instantly increase over 20%. The reason is simple: avoiding capital gains taxes. The maximum federal capital gains tax rate is 20 % on long-term holdings.  Consider the following example which is based on the assumption that you plan to sell stock and give to charity in the same year.    

Let’s say you bought 100 shares of XYZ Corp two years ago at $20 per share, for a $2,000 cost basis (100 x 20 = 2,000). If XYZ now trades at $50 per share, the fair market value of your 100 shares has risen to $5,000 (100 x 50 = 5,000).  Congrats, you made $3,000!

If you were to sell those shares in order to donate the after-tax proceeds to charity, you would owe $600 in federal taxes under the top long-term capital gains tax rate of 20%: (5,000 – 2,000) X 0.2 = 600. That would permit a donation of $4,400 (5,000 – 600).  Donating the shares of stock instead would net the charity its full $5,000 value. It would also entitle you to claim a $5,000 itemized deduction, within certain limits.

How do I claim a deduction?

When you file your tax return every year, you’ll need to itemize your deductions in order to claim tax deductible donations to charity. For donations over $250, the IRS requires you to get a written letter of acknowledgment from the charity.  

We strongly recommend consulting your tax professional when itemizing and filing deductions.