The holiday season is upon us, and with it comes the annual rush to purchase gifts for friends and family. While most people exchange gifts with those they know — colleagues, family members, coworkers, others who are fortunate enough also give back to those they don’t know in the form of charitable donations.
While it is fairly well-known that charitable gifts are tax-deductible, those who contribute charitable donations should understand the stipulations that apply. A donation to a charitable organization is eligible for a tax deduction in the year that the donation was made. If a cash donation is made to public charity, the donor is eligible for a deduction of up to 50% of his or her adjusted gross income. If the donation includes appreciated assets, the donor is eligible for a deduction of up to 30% of his or her AGI. Cash donations to private organizations are eligible for up to a 30% deduction, while appreciated asset donations to private organizations can return up to a 20% tax deduction. In the event that any amount of the donation is not fully deductible, the deduction can carry over for up to five years.
Those making charitable donations during the holiday season are also advised to understand if their deduction base is fair market value or basis, which can vary by the asset and charitable organization. Assets that are held 12 months or longer are often considered fair market value property. For contributions to a private foundation, only long-term stock options in an established equity market typically qualify as fair market value property.
It is always advised that taxpayers follow the Internal Revenue Service’s guidelines to ensure they qualifiy for eligible deductions. Whether you are making a simple cash donation to public charity or a larger, more complicated donation, it is best to meet with an experienced financial advisor to understand the deduction process and best practices.