For donors who itemize their deductions, making charitable gifts can play a significant role in reducing taxable income. There are rules, however, that go along with how much one can deduct from adjusted gross income for gifts to charities.
Cash gifts can be deducted up to 50 percent of adjusted gross income. Any excess may be carried over for five additional years until the deduction is exhausted.
Gifts of Appreciated Assets
Gifts of appreciated assets, such as securities and real estate, can be deducted at full fair market value up to 30 percent of adjusted gross income. If the gift is made outright to charity, then the entire capital gain on the asset is avoided. Gifts that return income may have some capital gains ramifications.
Gifts of Non-Cash Assets
Gifts of non-cash assets, such as real property and interest in an existing life income gift, are also subject to the 30 percent limitation.
Gifts of Tangible Personal Property
Gifts of tangible personal property, such as works of art* or jewelry, are subject to the 30 percent limitation. In addition, in order to claim a full fair market value deduction, those assets must be used in relation to the charity's mission. Otherwise the "related use" rule fails, and the donor may only deduct her cost basis in the asset.
*You cannot donate a work of art to Smith and derive income from it (as in a charitable remainder trust). Either it will hang on the wall of the Smith museum or it will be sold in a trust to produce income for you. It cannot do both.
When Charlotte '47 decided she could no longer use her vacation home, and her children were not interested in inheriting it, she decided to give it to Smith in support of scholarships. She discussed the gift with Smith, obtained an appraisal for the property, and was able to claim an immediate income tax deduction for the appraised value of her home, avoiding any capital gains tax. Smith sold the property and used the proceeds to establish a scholarship fund in Charlotte's name.