Timing and Limitations of the Charitable Donation Deduction

In this post, I discuss the charitable donation deduction, its limitations, and how knowledge of this information can help you with your tax planning.

*Photo by Howard Lake is licensed under CC 2.0. *

In a previous post, I provided a brief overview of the charitable donation deduction. One important aspect of the charitable donation deduction is the timing of the deduction and its applicable limitations. Without a clear understanding of these topics, conducting proper tax planning becomes very difficult.

In this post, I will briefly discuss when a charitable donation is considered complete for tax purposes to help you understand in what tax year the charitable donation deduction will apply. I will also discuss the limitations of the charitable donation deduction. The two are related, as understanding both can help you time your charitable giving in light of applicable limitations.

Timing of the Charitable Donation Deduction

The point at which a donation is considered complete—and therefore deductible—for tax purposes depends on the type of gift and the manner in which it is given. For timing purposes, the following rules apply.

1. If a contribution is made in the form of a check, its effective date is the date of the mailing of the check. Notice this means that the deduction is not determined by when the check clears or even when it is cashed.
2. If the charitable contribution is made by credit card, the effective date of the gift is the date the charge is made to the cardholder’s account.
3. If the contribution is made in the form of stock, the gift is not complete until the stock is actually transferred onto the charity’s books. Therefore, timing can be a concern, as the donor is dependent on the charity to act expeditiously. If, however, the donor mails endorsed stock certificates to a charity or a broker who is an agent of the charity, then the gift is effective as of the date of the mailing. So, if you are looking to donate stock at the end of your tax year and are cutting it close, sending endorsed stock certificates may be something to consider.
4. Providing a pledge or promissory note to charity is not deductible until payment is actually made.
5. Donated stock options are deductible when the option is actually exercised. The amount of the deduction is equal to the excess of the fair market value of the stock over the exercise price.

I would encourage anyone considering giving a noncash gift to charity to consult with a competent attorney or tax professional to ensure you time the gift to take the greatest possible advantage of the charitable donation deduction.

Deduction Limitations

The income tax deduction for charitable donations is not unlimited. The amount that can be deducted is affected by the charitable organization and the kind of property donated. For gifts to public charities, the charitable donation deduction is limited to 50% of the donor’s adjusted gross income—without regard to any net operating loss carried back—for gifts of cash or ordinary income property. The deduction is limited to 30% of adjusted gross income for gifts of capital gains property.

Public charities include:

1. churches;
2. schools;
3. hospitals and medical organizations;
4. organizations that receive a substantial part of their support from federal and state sources and the general public;
5. state and federal government units;
6. charitable trusts, funds, and foundations, such as the Red Cross.

Donations to nonpublic charities are limited to 30% of the donor’s adjusted gross income for cash and ordinary property and 20% for capital gains property.

Nonpublic charities include:

1. private foundations;
2. cemetery companies;
3. fraternal lodges;
4. veterans of war posts and organizations.

In addition, corporations can take deductions up to 10% of their contribution base, which is equal to their taxable income.

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See Also:

Charitable Deductions

Noncash Gifts to Charity