Philanthropy can be an important component of financial planning. People enjoy supporting causes, organizations, and institutions that they are passionate about. But with a little strategic planning, philanthropic giving can provide substantial tax deductions for a donor. Charitable income tax deductions are generally capped at either 20%, 30%, or 60% of a donor’s AGI. But due to the CARES Act and the Consolidated Appropriations Act (CAA) passed late last year, charitable planning can be even more advantageous for taxpayers who give in 2021. Donors who make cash donations to qualifying charities in 2021 are eligible to deduct up to 100% of a taxpayer’s adjusted gross income (AGI).
Given the complexity of charitable rules, I will break the topic in to a series of posts. This post will cover cash gifts.
The General Rules
AGI is the bottom line on the first page of a taxpayer’s Form 1040; it is gross income (wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement distributions) “adjusted” by subtracting certain expenses (educator expenses, student loan interest, alimony payments, contributions to a retirement account like an IRA). In general terms, capital gain property and cash donations made to charitable entities are eligible for a deduction. As a first step in determining if a gift to your preferred charity is eligible for a charitable deduction, look to the IRS’s Tax Exempt Organization Search Tools and Publication 78 and see if it is listed.
The charitable deduction available to the taxpayer will depend on the kind of assets given and the type of organization to which the assets are given (see table below).
Type of Property Donated
Deduction for Donations to Public Charities (“First Category Organizations”)
Deduction for Donations to Private Foundations (“Non-FCOs”)
|Cash||Cash Value||100% of AGI in 2021
60% of AGI for Donations to Donor Advised Funds
|30% of AGI|
|Ordinary Income Property
Short-Term Capital Gain Property
Adjusted Basis or FMV
|60% of AGI||30% of AGI|
|Long-Term Capital Gain Property
– Real Estate
– Tangible Property (related use)
|Either FMV or Adjusted Basis||30% of AGI if FMV
60% of AGI if Adjusted Basis
|20% AGI and must use Adjusted Basis|
|LTCG Tangible Property (unrelated use)||Basis||60% of AGI||20% of AGI|
Cash Donations to “First Category Organizations”
Per IRC Section 170(b)(1)(A), First Category Organizations (FCOs) are charitable organizations which engage in inherently public activities. FCOs are also know as “50% Limit Organizations” because a cash donation to one would enable the donor a charitable deduction of up to 50% of their AGI. The Tax Cuts and Jobs Act, passed in 2017, increased that deduction to 60%-of-AGI until that Act sunsets at the end of 2025.
FCOs include houses of worship, educational institutions, government agencies, and other publicly supported charities, as well as donor advised funds, and private operating foundations. When a cash gift is made to an FCO, the general rule is that the donor is eligible for a charitable deduction of up to 60% of a her AGI for the year of the donation. As discussed above, thanks to the CARES Act and the CAA, a cash donation made in 2021 to a First Category Organization—other than a donor advised fund—is eligible for up to 100% charitable deduction against the donor’s AGI. If more that is given, the remaining contribution is allowed a 5-year carry forward to future tax returns, but at the 60% of AGI limit. In a future part of this series, I will discuss how to determine if pursuing a 100% deduction is optimal tax planning.
Cash Donations to Private Foundations
A key distinction must be made here between private foundations, which are not eligible for the 60%-of-AGI deduction, and private operating foundations, which are eligible for the 60% deduction and the 100% deduction in 2021. Private operating foundations engage in the active conduct of its exempt activities, and spends the lesser of 85% of net income, or its minimum investment return, on program activities. On the other hand, private foundations exist primarily to fund charitable work done by others, and they typically dictate that as little as 5% of its asset base be distributed each year. Cash gifts to private foundations are eligible for a 30%-of-AGI deduction.
Cash Donations made to both FCOs and non-FCOs in Same Tax Year
In the event a cash donation is made to an FCO and another cash donation is made to a non-FCO, the FCO deduction is considered first and maxed out at 50%-of-AGI, not 60%. Any remaining deduction would be carried forward to future returns. See examples below.
If John’s AGI in 2021 is $1MM and John makes cash donations to a First Category Organization other than his DAF, he will be able to deduct 100% of that donation against his $1MM AGI, leaving him no income tax liability.
If John’s AGI is $1MM and John donates $600k in cash to his donor advised fund in 2021, he can deduct all $600k from his AGI on his 2021 income tax return, which would drop his top marginal rate from 37% to 35%. His income tax obligation would drop from ~$308k on $1MM of AGI to ~$90k on $400k of AGI.
If John gives $800k in cash to that same DAF in 2021, he can deduct $600k of his AGI and carry the remaining $200k forward for 5yrs to future tax returns.
If John’s AGI IS $1MM and he donates $400k to the American Heart Association and he donates $333k to a family foundation (eligible for a 30%-of-AGI deduction), he is limited to a 50%-of-AGI deduction this year because he donated to an FCO and a non-FCO. John can deduct $400k for the cash donation to the church, and he can deduct $100k for the cash donation to the family foundation. The remaining $233k deduction will be carried forward for up to 5 years or death, whichever is first.
In the next part of this series, I will discuss the charitable deduction rules for non-cash gifts to charities, like appreciated stock, collectibles, or real estate.
For questions or comments reach out by email.
Keith A. Pillers, JD, CFP®, CIMA®, CPWA®
Director of Wealth Management
Disclosures. Investment advisory services offered through Ackerman Capital Management, L.P., a registered investment adviser. The content herein should not be considered a recommendation or personalized legal advice, tax advice or investment advice. It is not personalized advice of any kind. Consult with you tax advisors and legal advisors before taking any action relating to any content hereinabove. Further, the content herein is not intended as a recommendation of any kind under any circumstances. Any assumptions, opinions, and estimates are provided for illustrative purposes only and not a guarantee of future performance. Forward-looking statements should not be relied upon as actual results may differ materially from those anticipated. The content herein (quantitative or qualitative) is subject to numerous assumptions, risks, and uncertainties, which can change over time. Investing in the stock market involves gains and losses and may not be suitable for all investors. Ackerman Capital Management assumes no duty to update the content and does not warrant the accuracy or completeness of the content. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Users of the Content herein agree as a condition precedent to usage of such information that (i) all Content is accepted on an “as is” basis; (ii) the user freely and knowingly assumes all risks of Content usage, (iii) the user fully releases and hold Ackerman Capital Management harmless, along with its affiliates and all of their employees, owners, managers, and agents from any damages or losses resulting from the use of such Content by the user along with indemnifying Ackerman Capital Management for any damages, costs or attorney’s fees incurred by Ackerman Capital Management as a result of any uses of such Content by the user. All content herein is protected under the copyright laws of the United States and/or other countries, and only permitted for personal, non-commercial use. All other uses, redistributions, reproductions, or republish, in any form, are strictly prohibited without the prior written consent of Ackerman Capital Management.