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Charitable Giving & Your Taxes
Charitable Giving & Your Taxes Your Charitable Gifts Make a Difference for Others AND for Your Taxes

When you give away cash or goods to qualified nonprofit organizations, you will probably be able to take a tax deduction as partial reward for your generosity. However, the IRS rules for deducting charitable contributions aren’t as simple as many people might think. For example, deduction limits can apply, and certain gifts require timely written acknowledgment from the recipient organizations.

Qualified Charitable Organizations

In order for donations to be deductible, it must be given to a “qualified U.S. organization.” Not all nonprofit organizations qualify, but the IRS regularly publishes a list of the ones that do. In general, the qualifying groups can be categorized as:
  • governmental bodies;
  • nonprofit groups organized for religious, educational, scientific, or literary purposes;
  • war veterans’ groups;
  • fraternal societies and lodges; and
  • certain nonprofit cemetery companies.

Typical examples of qualified organizations include churches, nonprofit hospitals, colleges and universities, school booster clubs, libraries, public parks and recreation facilities, etc.

When gifts are made to fraternal organizations and lodges, only the part of the gift that those organizations give away to other qualified charities is deductible. In addition, gifts to a cemetery company can’t be deducted if they are earmarked for the care of a specific cemetery lot.

Limits on Charitable Deductions

In general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. And if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.

Gifts That Return a Benefit to You

If a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child’s tuition or to a church for a family wedding give the taxpayer a benefit and don’t qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren’t deductible - with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc.

In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church.The church determines that the value of the dinner and program is $15. Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.

Giving Your Time

Although you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity’s location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well.

Travel Away From Home For Charity

A charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction:

1 . You must perform services for the organization in an official capacity while you’re away from home.

2 . No “significant element of personal pleasure” must be connected with the travel. Does this mean your trip can’t be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.

Noncash Donations

Donations don’t always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).

Valuing Your Donation:

Perhaps the most difficult part of making noncash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there aren’t any cast-in-concrete formulas to give you the “right” answer.

Here are a few general guidelines that may help:

  • Consider the condition of each item being given away. Compare the style of your donation with current styles. Outdated and/or damaged property may have little or no market value. Categorize each item being given by its condition (e.g., poor, good, excellent, new, etc.)

  • Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours.

  • If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property’s value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See paragraph on "Donating Vehicles to Charity."

Your research will probably show that most used merchandise has a value that is considerably less than your property’s original cost!

However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form.

Donating Used Vehicles to Charity:

Beginning in 2005, Congress has imposed some tough new rules that will substantially limit the deduction for the popular charitable car donation. Past rules generally allowed taxpayers to deduct the fair market value (FMV) of the vehicle. Under the changes taking effect in 2005, if the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS has provided Form 1098-C for this purpose. There is an exception to the new rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities.” Please call this office for more information.

Record of Noncash Donations:

Keep a list of the donated items and include a description of the property, its cost and FMV and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address.

Recordkeeping for Cash Donations

For cash gifts, you should have a canceled check or a receipt from the donee. In addition, for each gift of $250 or more, a timely acknowledgment of the gift must be obtained from the donee organization; otherwise, a deduction is not allowed.

While many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction of $250 or more to request (and maintain in their records) substantiation from the charity.”

The charity’s acknowledgment must contain the following:

  • The amount of money and a description of the value of other property, if any, contributed.

  • Whether the charity provided any goods or services in return for the gift.

  • A description and reasonable estimate of the value of the goods or services provided.