The Internal Revenue Service Code allows U.S. taxpayers to deduct charitable contributions of money or property made to qualified organizations as long as they file an itemized tax return.
The general rule is that a tax payer may deduct up to 50% of adjusted gross income if the gift is made to a “qualified” organization. There is a 30% deduction limit for gifts to some private foundations. Examples of “qualified organizations” include a community chest, corporation, trust, fund or foundation organized or created in the United exclusively for charitable, religious, educational, scientific or literary purposes.
If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. The IRA issues letters to qualified charitable organizations so if you have any doubts about whether a charity is “qualified”, you should ask for a copy of the charity’s IRS letter. And always get a receipt when you make a charitable donation. Contributions must actually be made before the close of the tax payer’s tax year to be deductible.
So, what caused the United States to offer a tax deduction for charitable contributions in the first place? The story begins in 1913 with the passage of the 16th Amendment which gave Congress the power to levy an income tax on individuals. Before the United States entered World War I on April 6, 1917, the US government needed additional income, causing Congress to raise the lowest tax rate from 1% to 2% and imposing new taxes on estates and business profits.
It was the War Revenue Act of 1917, adopted October 3, 1917 just a few months after the US entered the war, which authorized the first tax deduction for charitable giving. According to the Act’s sponsors, this new charitable deduction was necessary if charities were to survive the war. It was feared that an increase in income tax would cause wealthy givers to cease making charitable contributions, especially to institutions of higher education.
At Strategic Wealth Planning, we encourage charitable giving throughout the year as a way to keep qualified charitable organizations strong and viable. The income tax deduction is certainly an added bonus.