Charitable Contribution Deduction: How It Works and What to Know

Your heart says, “give.” Your wallet says, “hey, watch it!” But what if giving could actually help your finances?

With the IRS charitable contribution deduction, your generosity can lower your taxable income – and maybe even your tax bill. Here’s how to make it work for you.

WHAT IS THE CHARITABLE CONTRIBUTION DEDUCTION?

Simply put, it’s a tax break for doing good. When you donate to IRS-qualified organizations, you can reduce your taxable income, and that often means a smaller tax bill. It might be the closest you can get to a win-win when it comes to the IRS.

Qualified organizations for the deduction include most public charities and educational organizations, religious organizations, some other kinds of nonprofits and certain private foundations.

So, what counts as a donation?

• Cash contributions: Not just bills and coins, but checks, credit card payments or electronic transfers.
• Property donations: These could be clothing, household items, cars, stocks or real estate, for example.
• Out-of-pocket expenses: If you volunteer for a qualifying organization, you can deduct the costs you incur (like supplies or mileage).

HEADS UP: SOME RULES ARE CHANGING

Before we go further, here’s a really important thing to note: In 2025, you can only deduct charitable contributions if you itemize deductions on your taxes (except for a special situation called a Qualified Charitable Distribution, which we’ll get to below). A lot of people don’t itemize; they take the standard deduction.

However, that may change now that the deduction limit for state and local taxes has been increased to $40,000 (starting in tax year 2025). For many people, being able to deduct more income/property taxes means it will be more beneficial to itemize – and charitable contributions will look more attractive from a tax perspective too.

But there’s also another change on the horizon: Starting in 2026, you can take a small charitable deduction for cash contributions even if you don’t itemize ($1,000 if single; $2,000 if married filing jointly). However, not all kinds of organizations qualify for this deduction.

Finally, tax year 2026 will bring the introduction of a 0.5% “floor” for the deduction. You won’t be able to deduct an amount equal to 0.5% of your taxable income. Only deductions above that would qualify. For example, if your income is $100,000, the first $500 of donations would not be deductible.

So, if you’re deciding whether, how much, or when to donate based on the deduction, make sure you’re considering your full tax picture and upcoming changes.

BUNCHING DISTRIBUTIONS

If you’re able, one common tax strategy that can help with the standard-vs-itemized deduction quandary is to make several years' worth of your planned charitable contributions at once.

For example, say you usually donate $5,000 a year to charity. You could instead donate, say, 5 years' worth of donations at one time. You would then itemize and deduct the entire $25,000 for that year (assuming it’s within the limits, discussed below) and then go back to claiming the standard deduction for the next 4 years.

Bunching could also help you get ahead of another 2026 change that’s coming: Deductions will be a maximum of 35% deductible even if you’re in the top tax bracket of 37%. If that’s you, your tax due will only be reduced by $35 for every $100 donated, instead of $37. So, moving as much of your contributions into 2025 as possible could get you a bigger break.

QUALIFIED CHARITABLE DISTRIBUTIONS

This is a special kind of contribution where you:

• Are at least age 70 ½
• Make a distribution directly from your IRA to a qualified organization

One benefit of QCDs is that you can take advantage of them (generally up to $108,000 per person in 2025) without needing to itemize or being subject to the usual AGI limits that we’ll discuss later. That’s because rather than being a “deduction” per se, it’s instead not included in your taxable income. If you qualify, learn more about qualified charitable distributions.

CHARITABLE CONTRIBUTION DEDUCTION LIMITS

If you’re especially generous, note that the IRS charitable contribution rule limits how much of your donations you can actually deduct. The limits are based on the type of donation and charity:

• Cash contributions to public charities: You can generally deduct amounts worth up to 60% of your adjusted gross income for the year (but for certain kinds of contributions, it’s 50% – check with your tax professional to be sure)
• Donations of appreciated long-term property (like stocks) to public charities: You can generally deduct amounts worth up to 30% of your AGI
• Certain gifts to private foundations: You can often only deduct amounts worth up to 20% or 30% of your AGI

The limit calculations can get complicated, especially if you make different kinds of donations. Consider using a tax pro or tax software if you’re close to the limits.

CARRYING EXCESS DONATIONS FORWARD

If your charitable contributions exceed the annual AGI limits, the IRS allows you to carry forward the unused deduction for up to five years. This means you can still benefit from large gifts over time.

Let’s say you donate $50,000 in cash one year and your AGI is $75,000.

In that year, you can take a $45,000 deduction (60% of $75k) and itemize.

In the following year, you can carry forward the rest of your contribution ($5,000) and deduct it (which will be subject to the new .5% floor, starting in 2026), as long as you itemize again and don’t have other contributions that put you over the limit.

PUBLIC CHARITIES VS. PRIVATE FOUNDATIONS

Most “big name” charities that everyone’s heard of are public charities – like the Red Cross, Habitat for Humanity or Goodwill.

Churches, hospitals and local organizations that you might donate to are also public charities.

Most people are unlikely to donate to a private foundation. These are generally funded from one source, like a wealthy family, and usually make grants to other charitable organizations rather than carry out charity work themselves.

Bottom line: If you don’t already know that the organization you’re giving to is a private foundation, it’s probably not.

HOW TO CALCULATE YOUR CHARITABLE CONTRIBUTION DEDUCTION

Here’s a simple roadmap:

• Decide whether to itemize. Compare your total itemized deductions to the standard deduction to determine if itemizing saves you more.
• Verify the charity. Use the IRS Tax Exempt Organization Search Tool to confirm the organization qualifies.
• Apply AGI limits. Determine which percentage cap applies to your donation type – see the example below.
• Value non-cash donations. The IRS generally requires you to use the “fair market value” (what you could theoretically get by selling the donation) for property. For items over $5,000, you’ll need an appraisal for donations other than publicly traded securities.

EXAMPLE

Let’s say your AGI is $100,000 and you donate $50,000 in cash to a public charity.

Step 1: The limit for cash to a public charity = 60%
Step 2: 60% of $100,000 AGI = $60,000

Result: Your $50,000 donation is fully deductible because it’s under the $60,000 cap. Great news for your favorite cause and your tax return!

DOCUMENTATION REQUIREMENTS

The IRS loves receipts. Here’s what you need:

• For cash donations: Receipt or other documented record of the donation
• For non-cash donations worth over $500: the above, plus IRS Form 8283 completed
• For non-cash donations worth over $5,000: the above, plus a qualified appraisal for donations other than publicly traded securities
• For all other non-cash donations (under $500): You don’t have to submit any documentation, but you should keep a receipt or other written record for the donation

COMMON MISTAKES TO AVOID

To make the most of your deduction and avoid getting in trouble with the IRS, make sure you avoid these missteps:

• Donating to non-qualified organizations (check before you give!)
• Overestimating the value of your donation
• Forgetting to track small cash donations or things like mileage if you volunteer your time
• Not being strategic with itemized deductions for charitable contributions

HOW CHARITABLE CONTRIBUTION DEDUCTIONS FIT INTO YOUR TAX PLAN

Charitable giving isn’t just generous – it’s strategic. At a minimum, the charitable deduction can reduce your taxable income for the year.

Strategic giving, like bunching donations or donating appreciated securities, can also complement your estate planning strategies and potentially have a large, long-term impact on the taxes you pay and the money you have available in retirement. It becomes even more valuable at times like this, when rules are changing.

MAKING THE MOST OF THE TAX DEDUCTION FOR CHARITABLE DONATIONS

To recap:

• Know what you can deduct
• Keep good records
• Work with a tax pro and financial advisor to make sure both you and your chosen charity are getting the most out of your donations

At Edelman Financial Engines, we love it when our clients want to help support their communities and those across the globe. And a tax deduction could even give you money back so you can do more good!

Ready to make your generosity go further? One of our financial advisors can help you be strategic with your giving.