How to Calculate Donations for Tax Purposes

By Joseph Nicholson
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The more you make, the more you can give. It seems obvious, but actually the Internal Revenue Service (IRS) limits the amount anyone can deduct for charitable donations based on their income. Those with high incomes not only can give more, but they get more out of their deductions. This is simply because the value of a deduction in taxable income presents a saving equal to the deduction times your tax rate.

Verify eligibility. You can deduct a charitable donation on your income taxes only if it is made to a designated 501(c) organization. Donations to groups not so designated are not eligible for tax deductions. IRS Publication 78 (see Resources) is a complete list of designated organizations eligible to receive tax-deductible donations.

Calculate your adjusted gross income. The IRS caps your annual deductions from charitable contributions to 50 percent of your adjusted gross income. It is therefore necessary to calculate this amount before determining the extent of your donations that can be deducted. Adjusted gross income is line 37 of Form 1040.

Distinguish between tax-deductible organizations. The 50 percent cap represents the total amount of donations that can be deducted. Within this limit, no single donation can be deducted in excess of 30 percent of your adjusted gross income if it is made to a certain types of organizations. These groups subject to this additional restriction include nonprofit cemeteries, veterans' organizations, fraternal societies and certain private non-operating foundations. Publication 78 describes whether each tax-deductible charity is subject to this rule.

Adjust for capital gains. Most donations of property are priced at their market value at the time of donation for tax deduction purposes. The exception to this is property that represents a short-term capital gain. These properties must either be reduced by the amount of the gain, or the gain must be reported as such on Form 1040. Other property, such as stocks, bonds, jewelry, coin or stamp collections, cars or personal furniture, may be subject to long-term capital gains. Such capital property does not need to have its market value reduced or reported as income. However, no single capital asset in this latter category can be deducted in an amount more than 30 percent of your adjusted gross income. If it is given to an organization subject to the 30 percent restriction in the step above, the deduction cannot exceed 20 percent of your adjusted gross income.

Report deductions. If your eligible donations made by cash or check are more than $250, they are reported on line 16 of Schedule A (Form 1040). If you're claiming non-cash deductions of more than $500, this is listed on line 17 and must be accompanied by IRS Form 8283, Noncash Charitable Contributions.

About the Author

Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.