Some people get so much joy and fulfillment out of giving to charity that the good vibes themselves are reward aplenty. Others could use a little extra encouragement to open their hearts (and wallets). That's where the federal tax deduction for charitable contributions comes in. It lets you reduce your taxable income, dollar for dollar, by the amount you give to charity. This deduction isn't unlimited, though. There's a maximum amount you can deduct, but it's not a dollar figure. It's a percentage of your income.
The absolute upper limit for your charitable tax deductions is 50 percent of your adjusted gross income, or AGI. You determine your adjusted gross income by filling out the first half of your tax return. If your AGI for a given year comes to $50,000, for example, then you cannot claim a deduction that year for more than $25,000 worth of contributions to charity -- regardless of how much you actually gave.
Here's where things get a little tricky. As long as your donations were made to what the Internal Revenue Service calls a "50 percent limit organization," you can deduct contributions of up to the full 50 percent of your AGI. Most charities do, in fact, qualify as 50-percent-limit organizations, and IRS Publication 526 provides an extensive description of what counts and what doesn't. When in doubt, just contact the charity. Someone there should be able to tell you.
Some groups can accept tax-deductible donations but are not 50-percent-limit organizations. These include veterans' organizations and fraternal groups. You can still deduct your contributions to such groups, but only up to 30 percent of your adjusted gross income.
Capital Gain Property
Additional limits apply if your contribution is in the form of "capital gain property" rather than cash or donated goods. A capital gain property is something that -- if you sell it rather than donate it -- would produce a long-term capital gain. Examples include stocks, bonds, real estate and other assets that you've owned for longer than a year and that have increased in value. If you donate a capital gains property to a 50-percent-limit organization, you can deduct the value of the donation only up to 30 percent of your adjusted gross income. If you donate a capital gains property to a non-50-percent-limit organization, you can deduct the value of the donation only up to 20 percent of your AGI.
Rolling Over Unused Amounts
If you have "extra" charitable contributions that you aren't able to deduct because they exceed the allowable percentage of AGI, there's good news: You can carry the extra amount forward to the next year and deduct it then, up to the applicable AGI limits. And if you still have leftover contributions, you can carry them forward again, and again. In total, excess charitable contributions can be carried forward for five years after the year in which they were made.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.