December 6, 2022

Understanding How Charitable Tax Deductions Work

Incentivized by the IRS, charitable tax deductions are a great way to give back to the community while lowering your overall tax liability.

While there are many different ways to give to charity, the gifts that you donate matter as these items can affect whether you can claim a partial or full charitable deduction. Therefore, we hope to help by providing you with some pointers on how to make the most of your charitable giving during tax time.

How much does what I give to charity make a difference on my taxes?

It is only through itemizing your deductions that you will be able to use charitable contributions to lower your tax liability. This is typically done when the sum of your projected deductions—which includes your charitable contributions—is greater than the standard deduction. 

With this in mind, you should keep track of your charitable donations throughout the year and take note of any other additional applicable deductions. The larger deductions should always be the one that is used when it comes time to file for your taxes.

Standard Tax Deductions for 2022

standard tax deductions from the IRS
Source: IRS

What is the maximum tax deduction I can claim from my charitable contributions?

When you make a monetary donation to a public charity, you are eligible for a deduction of up to 60% of your adjusted gross income. As long as you have held your appreciated assets for a year—which includes long-term appreciated stocks and property—up to 30% of your adjusted gross income can often be deducted at fair market value. However, it may be more tax-efficient to combine multiple asset types to help increase the amount you can claim as a charitable tax deduction.

What is required to claim a charitable contribution deduction?

If you do intend to claim your charitable deduction after deciding to donate to charity, you should keep the following steps in mind:

  1. Verify if the non-profit group is a private foundation or 501(c)(3) public charity.
  2. Maintain a record of the donation (i.e., the tax receipt from the charity).
  3. For non-cash donations, you may need to get a qualified appraisal to support the deduction amount you are claiming.
  4. Prepare your documentation, itemize your deductions, and submit your tax return in a timely manner.

Am I able to take a Fair Market Value deduction for private S-corp or C-corp stocks to charity?

While this is certainly possible if the beneficiary organization qualifies as a public charity, the more important factor to consider is the charity’s capacity to accept gifts of private stock. This is because most charitable organizations lack the funds, knowledge, or desire to accept such private stock and liquidate them effectively, especially during the busy holiday season.