Do you make charitable contributions because you get a tax deduction, or do you make them because you believe in the mission of the nonprofit organization? Or is the real answer somewhere in-between those two?
Regardless of your answer, there may a time when your charitable contributions made in a tax year exceed the amount that you can deduct on Schedule A of your Form 1040 for the year. The deduction for most charitable contributions is limited to 60% of your adjusted gross income (AGI). Note: there are some other percentages that can come into play if the item given away is capital gain property or the contribution is not made to a public charity – we are not covering that here.
So, what happens if your income for a year suddenly drops and you have already given away more than 60%? Do you lose the benefit of the tax deduction?
And the answer to that is a resounding, but qualified, no! The contributions can be carried over for five years. However, and this is a big however, the carryover contributions cannot be considered until any contributions from the current year have been considered.
Let me explain this with some numbers (I am an accountant – I like numbers). Pretend you have contributions that you could not use in 2018 and are carrying them over in the amount of $24,000. You also just contributed in 2019 to your favorite charity in the amount of $24,000. That is $48,000 total available that you may be able to deduct on your 2019 Schedule A, subject to the 60% AGI limitation.
If your 2019 AGI is $40,000, then the allowable amount of charitable contributions would be $24,000 (60% of your 2019 $40,000 AGI). But not the $24,000 from 2018 – the $24,000 from 2019. That leaves just four more years on your 2018 charitable carryover before you lose it.
Alternatively, pretend your 2019 AGI is $60,000 – the allowable amount of your charitable contribution would be $36,000 (60% of the $60,000 AGI), which would consist of the $24,000 from 2019 and $12,000 of your carryover from 2018, leaving you with a $12,000 charitable carryover to 2020 from 2018 and none from 2019.
I know – this is all as clear as mud. But if your reasons for making charitable contributions lean more towards the deductibility on your income tax return than altruistic reasons, then keep one eye on your AGI when you are writing a check to your favorite charity.
For additional information on how to take advantage of tax deductions of any kind, feel free to contact a Henry+Horne tax professional who is eager to assist you.
Donna H. Laubscher, CPA