Many nonprofit institutions are exempt from paying federal income tax, but taxpayers may deduct donations to organizations set up under Internal Revenue Code section 501(c)(3) on their income tax returns. Donations to other nonprofits are not eligible for a tax deduction, but earnings on their assets still are largely exempt from taxation.

Since 1917, individual taxpayers have been able to deduct charitable contributions from income that might otherwise be taxed. Individuals may deduct cash and certain other contributions up to 60 percent of adjusted gross income (AGI) in a given year and may carry forward any excess for deduction on future tax returns for up to five years. Before the 2017 Tax Cuts and Jobs Act, the limit was 50 percent of AGI. An important caveat: only taxpayers who itemize may take the charitable deduction. The vast majority of taxpayers instead claim a standard deduction in lieu of all itemized deductions, which for most are generally smaller than the standard deduction. The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts and reduced the amount of other itemizable deductions, thereby greatly reducing the number of taxpayers who itemize and, hence, the number who have a tax incentive to make charitable contributions.

In 1935, Congress extended the right to deduct charitable contributions to corporations. Corporations may not deduct more than 10 percent of their pretax income in a given year but, like individuals, may carry forward excess donations for five years. Some corporate contributions, however, might also qualify as marketing or other business expenses. The corporate limit was raised to 25 percent for taxable years 2020 and 2021.

Contributions by individuals or corporations can take the form of cash, financial assets, or other noncash property such as real estate, clothing, or artwork. Some  contributions face greater restrictions than cash contributions, whereas others receive more generous treatment than cash. The limit for donations of appreciated real property is generally 30 percent of AGI, and the limit for contributions to private nonoperating foundations is the same.

Donors may deduct the full current market value of appreciated property up to the limit, with excess amounts potentially eligible for carryover to succeeding tax years. This effectively allows them to deduct the capital gain portion of the contribution twice: donors pay no tax on the capital gains of the appreciated property and then reduce their other income subject to tax by the full amount of their contribution. They effectively deduct from income the capital gains that never became subject to tax in the first place.

However, those capital gains would also be excluded from income tax if held until death, even if not given away. As long as that provision remains in place, removal of the lifetime special tax break for gifts of appreciated property may encourage many taxpayers to delay such gifts until death or not donate at all.

Updated January 2024