What is a Gift Deduction?

Ken Black

A gift deduction is a tax deduction that can be taken for donations made to charitable organizations. In order to legally deduct such a gift, it must be given to a charitable, non-profit organization. Gifts to family and friends or any other individuals would not be subject to the gift deduction.

Generally speaking, a gift deduction can't be more than 50 percent of an individual or couple's adjusted gross income, according to the IRS.
Generally speaking, a gift deduction can't be more than 50 percent of an individual or couple's adjusted gross income, according to the IRS.

For most people, in any given year, the gift deduction will likely not make much of a difference on taxes. However, for those who have given a large gift, such as a vehicle, to a charity, the deduction could be significant. Closely related to the gift deduction is the charitable contribution, which some may consider a cash gift. However, the difference is the value of a cash donation is more easily determined.

To get the gift deduction for a larger item, such as a vehicle, boat or airplane, the Internal Revenue Service (IRS), requires you to attach Form 1098-C. This form gives the IRS the information they need in order to make sure the deduction is in order and not an attempt at fraud. The information on the form includes the name and identification numbers for both the donor and recipients, as well as information regarding the value of the donation and its use.

The gift deduction for charitable gifts also comes with a limit. In most cases, the IRS rules say the deduction cannot be more than 50 percent of an individual's or couple's adjusted gross income. After that, there is no tax benefit to donating any money. However, while the vast majority of donations will be to one of these organizations, there are some organizations where only 30 percent or less of your adjusted gross income can be claimed as a gift deduction. If unsure, asking the receiving agency what type of organization they are. They should have that information readily available.

The other major thing that must be done with gift deductions is to determine the fair market value. In most cases, gifting a new item is relatively easy, because the fair market value is the sales price you paid for it, excluding sales tax. However, for those who are donating used items, the situation could be more difficult. For vehicles, the IRS recommends using the Blue Book, private party sale value, making adjustments for condition, mileage, equipment and other such considerations. To determine the value of clothing and household items, look for similar items being sold in secondhand stores and note those prices. Be warned that the IRS may require documentation, such as pictures to support your claims of value.

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