How to Use the Gift Tax Charitable Deduction

The gift tax charitable deduction is a provision in the U.S. tax code designed to encourage philanthropic giving. It allows an individual to make a donation to a qualified charitable organization without that gift being subject to federal gift tax. This means the value of the charitable gift does not count against the donor’s lifetime gift tax exemption amount.

This tax tool effectively separates charitable giving from personal gifting. It ensures that generosity towards eligible organizations does not diminish the amount one can pass to family and friends free of tax.

Determining What Gifts Qualify

For a donation to be eligible for the gift tax charitable deduction, it must meet two criteria related to the recipient organization and the nature of the gift itself. The first requirement is that the contribution must be made to a “qualified charitable organization.” These are organizations granted tax-exempt status under Internal Revenue Code Section 501(c)(3), and include a wide range of entities such as religious organizations, educational institutions, nonprofit hospitals, and public charities.

A donor should verify an organization’s status before making a gift. The IRS provides a free online tool called the Tax Exempt Organization Search, which allows anyone to confirm if an organization is registered and eligible to receive tax-deductible contributions. Gifts to individuals, political campaigns, or for-profit entities are not eligible for the deduction.

The second requirement for a straightforward deduction is that the gift must be an “outright gift.” This means the donor transfers their entire interest in the donated property to the charity, completely and irrevocably. The donor cannot retain any control or benefit from the asset once it has been given.

Calculating the Value of the Deduction

The value of the gift tax charitable deduction is directly tied to the value of the asset being donated. For gifts of cash, the calculation is simple: the deduction amount is the dollar amount given to the charity. When property other than cash is donated, the deduction is based on the asset’s Fair Market Value (FMV) at the time the gift is made. FMV is defined as the price that the property would sell for on the open market.

A significant aspect of the gift tax charitable deduction, which distinguishes it from the income tax charitable deduction, is the absence of percentage-based limitations. For income tax purposes, charitable deductions are often capped at a certain percentage of a taxpayer’s Adjusted Gross Income (AGI). However, for gift tax purposes, a donor can deduct the full fair market value of qualifying charitable gifts without such AGI-based restrictions.

Special Rules for Partial Interest Gifts

When a donor decides to split the interest in a property between a charitable and a non-charitable beneficiary, the gift is known as a partial interest or split-interest gift. These arrangements are more complex than outright gifts, and special rules apply to determine the gift tax charitable deduction. The deduction is not for the full value of the property, but only for the present value of the interest that the charity is designated to receive. This value must be ascertainable and calculated using specific IRS actuarial tables and interest rates.

Two of the most common structures for making partial interest gifts are Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). A CRT involves transferring assets to a trust that provides an income stream to the donor or another non-charitable beneficiary for a specified term or for life. At the end of that term, the remaining trust assets, or the “remainder,” are distributed to the designated charity. The gift tax deduction is calculated based on the present value of that charitable remainder interest.

Conversely, a Charitable Lead Trust operates in the opposite manner. In a CLT, the income from the trust assets is paid to a qualified charity for a set number of years. After this period, the remaining assets are transferred to a non-charitable beneficiary, such as the donor’s children or other heirs. For gift tax purposes, the donor receives a deduction for the present value of the income stream that the charity will receive.

The rules governing these trusts are strict. For instance, the income payments in both CRTs and CLTs must be structured as either a guaranteed annuity (a fixed dollar amount each year) or a unitrust (a fixed percentage of the trust’s value, recalculated annually). Due to their complexity, establishing a partial interest gift requires assistance from legal and financial professionals.

Reporting the Deduction on Form 709

To claim the gift tax charitable deduction, a donor must properly report it on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. A return is required if a person makes gifts to any single recipient that exceed the $19,000 annual exclusion amount for 2025. If a donor is required to file Form 709 for non-charitable gifts, they must also report their charitable gifts on the same return. If the only gifts made during the year were to qualified charities for the donor’s entire interest in the property, a Form 709 is not required.

Before filling out the form, a donor must gather specific documentation. For any single contribution of $250 or more, a contemporaneous written acknowledgment from the charity is required. This document must state the amount of cash or describe the non-cash property contributed. For non-cash property gifts valued over $5,000, the donor must also have a copy of a qualified appraisal and attach Form 8283, Noncash Charitable Contributions, to their tax filings.

The deduction itself is reported on Schedule A of Form 709. Charitable gifts are listed in Part 1, alongside other gifts made during the year. The deduction is then claimed in Part 4, “Taxable Gift Reconciliation.” On line 7 of this section, the donor enters the total value of their charitable gifts, which are then subtracted from the total gifts made during the year. This ensures that the value of the charitable contributions is excluded from the calculation of taxable gifts.