For frequent donors, charitable contributions can quickly add up to sizable deductions, but the rules can be complex – like most tax rules. There are qualifications to consider – concerning the type of donation and type of receiving organization – as well as giving limits. When itemizing deductions at the end of the tax year, it’s important to follow these rules, as this will prevent the IRS from reclassifying a donation as a non-deductible expense.
Working with a knowledgeable tax professional will shed light on the specifics of deducting charitable contributions, so you can save a little while giving a little.
What Does the IRS Consider a Qualifying Charitable Organization?
In the eyes of the IRS, not all charitable organizations are the same from a tax perspective. Only some are qualified to receive tax-deductible donations. To clear that bar, the charity must be a nonprofit organization that’s classified as a 501(c)(3) status through the Internal Revenue Code. These organizations may be religious, scientific, educational, charitable, or literary in nature, or they may work to prevent cruelty to animals or children.
Some examples of qualifying organizations include:
- Churches, mosques, temples, synagogues, and other religious institutions
- Boys and Girls Scouts of America
- Boys and Girls Clubs of America
- The Red Cross
- Salvation Army
- United Way
- Fraternal orders, if gifts are used for qualifying charitable purposes
- War veterans’ groups
- Nonprofit schools, colleges, museums, hospitals, and organizations researching medical cures
- Federal, state, and local governments, if donations are used solely for public purposes, including donations to volunteer fire departments and public parks
Though that casts a fairly wide net, there are still plenty of organizations that do not qualify under the IRS’s definition.
Some examples include:
- Country clubs and lodges, unless they qualify as a charity
- Civic leagues
- Social and sports clubs
- Labor unions
- Chambers of commerce
- Political organizations and candidates
- Foreign organizations, with some exceptions among Canadian, Mexican, and Israeli charities
- Homeowners’ associations
When donating, verify the organization’s status as a qualifying charitable organization to ensure tax deductions are on the table.
Deductible vs. Non-deductible Charitable Contributions
The IRS also has rules in place as to what kind of donation is considered tax deductible. Not only must the donation be given to a qualifying organization, but the contribution also must qualify. Assuming the organization qualifies, here’s what can be donated for a tax deduction:
- Cash, check, credit or money order
- Property donations other than cash or check
- Out-of-pocket, travel, or vehicle expenses when volunteering for a qualifying organization. For travel expenses, significant personal pleasure or recreation may not be tied to travel to qualify.
- Limited portion of expenses paid for a student living with the taxpayer under a written agreement, sponsored by a qualifying charitable organization
Here are some common examples of contributions that do not qualify under the IRS definition:
- Political contributions
- The value of a taxpayer’s time or services
- Gifts to an individual
- Donations to organizations engaged in lobbying, for law changes, or for the taxpayer’s trade of business
- Tuition at a school that is a qualified charity (but may qualify for education tax benefits)
- The cost of raffle, bingo, or lottery tickets (but may qualify as a gambling loss)
- The value of blood given to a blood bank
- Adoption expenses
- Contributions in excess of $250 if written acknowledgement is not retained
- The transfer of a future interest in tangible personal property
- The amount of a contribution where a benefit was given in exchange
- Some contributions to donor-advised funds
As you can see, the qualification rules for charitable organizations and contributions are comprehensive and potentially complex. If there is any confusion about a particular charitable transaction, a tax expert can provide clarification.
Contributions That Benefit the Giver – Some Considerations
There are a handful of special tax provisions regarding contributions that also provide a benefit to the giver. For example:
- When the giver receives something of value in return for donating – The value of any gift given in return for a donation must be subtracted from any tax deduction. For example, if a taxpayer receives a $25 gift card in return for donating, the gift card’s value may not be tallied in the resulting tax deduction.
- When the giver donates to a university and receives athletic tickets – Donations to a university or college are not deductible if athletic tickets or seating rights are received in return.
- When the giver receives a ticket for a charitable event – The value of attending a charity event is subtracted from the cost of the ticket, for tax deduction purposes. This is true even if the taxpayer did not attend the event, though they may claim the full deduction if the ticket is returned to the organization for resale.
- When the giver receives state or local tax credit for donating – If a donation to a charitable organization is expected to return a tax credit for state or local taxes, the value of that credit is not deductible from the donation.
Deduction Limitations for Charitable Contributions
On top of qualification rules, there are limits to how much people can deduct via charitable contributions. These limits are based on the taxpayer’s adjusted gross income (AGI), and they differ depending on what’s being donated.
Specifically, some types of contributions may offer a deduction up to 60 percent of the taxpayer’s AGI. Others only provide a 50, 30 or 20 percent deduction – again, determined by what’s actually being given. Here’s a summary:
- 60 percent AGI rule – Cash donations to a qualifying charity are deductible up to 60 percent of the taxpayer’s AGI.
- 50 percent AGI rule – Non-cash charitable contributions to a qualifying organization are deductible up to 50 percent of the taxpayer’s AGI.
- 30 percent AGI rule – The 30 percent rule applies in several instances. It is applied on any donation to a nonpublic charity, such as veterans’ organizations, fraternal societies, nonprofit cemeteries, and some private foundations.
The 30 percent rule is also applied to any property donation that’s used by the charity, cash contributions held in trust for a charity, student living expenses and some capital gain property contributions to public charities (though the 50 percent rule may also apply).
- 20 percent AGI rule – The 20 percent rule applies to non-cash contributions of capital gain property to nonpublic charities.
How to Deduct a Vehicle Donation
Vehicle donations are treated using an additional set of rules, depending on the value of the contribution. First, it’s important for vehicle donors to receive written acknowledgement of the donation, for verification purposes. Other than that, the following considerations apply depending on contribution value:
- More than $500 – If the vehicle is sold for more than $500 and there is no significant intervening use of or material improvement made by the organization, the deduction equals the gross proceeds from the sale. If significant material improvements or the use of material is required to sell the vehicle, the resulting deduction is equal to the vehicle’s fair market value. If the vehicle is given to a person of need or is sold for well under its value to a person of need, the resulting tax deduction is limited to the vehicle’s fair market value.
- Less than $500 – A written acknowledgement concerning the transaction is required for donations valued at $250 or more. If the charity sells the vehicle without significant material improvement for $500 or less, the resulting deduction is equal to the lesser of $500 or fair market value of the vehicle.
Charitable Contributions are Good for Society and Your Taxes
Charitable contributions can add up to big tax deductions, but the giving individuals must be aware of the relevant tax laws with filing their tax return – and there are plenty of them. If you’re confused about what charitable organizations and contributions qualify, a reputable tax professional can provide valuable insight. That way, you can give to causes you care about while getting the maximum deduction on your tax return.
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