In addition to the personal tax deductions allowed to be claimed for medical expenses, mortgage interest, and state & local taxes paid in a year, taxpayers are allowed to claim a tax deduction for donations to charitable organizations and qualifying tax-exempt private foundations.
As defined by the IRS, qualifying charitable organizations are: “Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).”
The IRS requires accurate records to be kept as confirmation in order to substantiate any claimed charitable deductions. Therefore, when making a donation to a qualified charitable organization, taxpayers should maintain proper records in the event of an IRS audit at a later date. Basic taxpayer record keeping rules for cash (cash, check, credit card, EFT) donations are as follows:
- Taxpayers must maintain either bank records or a written acknowledgement from the charitable organization noting the amount and date of payment. Bank records include bank statements, canceled checks and credit card statements that show the date of payment, the name of the charitable organization and the dollar amount of the payment.
- For any single donation of $250 or more in any one day, taxpayers must receive a written acknowledgement from the charitable organization by the earlier of the date the taxpayer files his/her tax return or the due date plus extensions of the tax return.
- For taxpayers that have set up charitable donations through a company payroll deduction plan, maintaining a copy of the W-2 which shows the amount withheld for charitable contributions over the course of the year will meet the substantiation rules. Additionally, a year-end employer paystub or employer provided document will also satisfy the record keeping rules.
For donations of non-cash items, such as clothing, furniture, housewares, etc., taxpayers will need a receipt from the charitable organization. Often, the organization will hand taxpayers a blank receipt reporting only the date of the donation. Taxpayers should complete the form by listing out the items donated, and the fair market value of the items – estimated as best they can as of the date of gift. There are several on-line sites that provide valuation guides to help donors determine the value of their donated items. One such resource published annually by The Salvation Army is their “Donation Valuation Guide”:
For taxpayers who donate a vehicle (generally automobiles, boats and airplanes) and claim a charitable tax deduction in the amount of $500 or greater related to the donated vehicle, the taxpayer should receive a Form 1098-C from the charitable organization reporting the proceeds from the sale of the vehicle by the organization within 30 days after the date of sale of the vehicle. The reported sales amount is the value allowed to be claimed as a tax deduction for the donated vehicle.
Taxpayers are also allowed to claim a tax deduction for donating investments that are held in their brokerage accounts. Donating long term capital gain property such as stocks, bonds and mutual funds that are held in a taxpayer’s financial portfolio, to a qualified charitable organization allows taxpayers to claim a tax deduction at the investment’s fair market value as of the date of donation. By donating long term capital gain property, taxpayers can avoid paying the capital gains tax on the appreciated value of the investment while still being allowed to claim the full fair market value of the investment as a tax deduction. For a donation of a short-term investment, taxpayers are only allowed a charitable deduction equal to the lesser of the cost basis of the security or the fair market value of the security at the date of donation.
When donating time or services to do volunteer work for a charitable organization, taxpayers are allowed to claim a charitable deduction for unreimbursed out-of-pocket expenses incurred while doing the volunteer work. The qualified expenses must be nonpersonal and directly related to the services being performed for the charitable organization. For a taxpayer’s record-keeping purpose, the taxpayer will need to obtain a letter of acknowledgement from the organization for the out-of-pocket expenses incurred of $250 or greater. To substantiate the charitable services performed by the taxpayer, the acknowledgement letter must include a description of the service(s) performed by the taxpayer. Taxpayers are not allowed to claim a charitable deduction for the “value of their services” provided on behalf of a charitable organization, all that is allowed to be claimed as a charitable deduction for tax purposes is the unreimbursed out-of-pocket expenses incurred specific to providing services that directly benefit the charitable organization while volunteering time to the organization.
For those taxpayers over age 70 ½ and who do not itemize deductions on their tax returns, a qualified charitable distribution (QCD) would be an easy way to make a charitable donation to a qualified charity and still be able to recognize a tax benefit. Taxpayers age 70 ½ are allowed to take a distribution from their IRA and donate the distributed funds from the IRA directly to a charitable organization. No tax deduction is allowed for the charitable donation, but the taxpayer does not recognize taxable income on the distributed IRA funds done as a QCD. For the IRA distribution to be a QCD, this transfer of funds must be done as one transaction, directly from the taxpayer’s IRA to the charitable organization – the taxpayer cannot take a distribution from their IRA and separately write a check to the charitable organization. For taxpayers age 73 or older, the QCD will also count toward the taxpayer’s annual required minimum distribution. The maximum QCD allowed per taxpayer per year is $100,000. A QCD can only be made to 501(c)(3) charitable organizations. Contributing to private foundations or funding your donor advised fund via a direct IRA distribution would not qualify as a QCD.
Taxpayers are also allowed to make charitable contributions directly from their business. Although the payment may be made directly from a taxpayer’s company’s operating bank account the payment is not reported as a business expense. The payment will be allowed and reported as a charitable deduction on Schedule A, personal itemized tax deductions.
And, as we have all seen throughout the internet world, scammers are present everywhere. Taxpayers need to be aware when solicited by unknown charitable organizations if the solicitation is for a legitimate charitable organization or not. To help taxpayers verify a charity as being real or fake, the IRS has established a search tool on their website. The link to the IRS Tax Exempt Organization Search is Tax Exempt Organization Search | Internal Revenue Service (irs.gov).
While gifting to exempt organizations will generally qualify for a tax deduction, there are several common donation scenarios that don’t qualify to be claimed as a tax deduction on your tax return. The following list of items will not qualify as tax deductible donations:
- Donations to political candidates, political parties, and political actions committees (PACs).
- Donations to civic leagues and chambers of commerce.
- Donations to specific individuals for benevolent purposes to financially assist those individuals such as donating funds to a family to help them recover from a disaster or for an expensive medical procedure that they may not be able to afford.
- Guestimates and undocumented donations. Examples include small cash donations without having proper documentation while attending religious services or dropping a bag of clothes and housewares at the local donation drop-off bin without receiving a donation receipt. Even for such small cash gifts, the IRS requires proof of the donation via a cancelled check, credit card statement or letter of acknowledgement of receipt from the religious organization for gifts less than $250. Similarly, the IRS requires a receipt from the charitable donation site that is the recipient of property in kind donations listing out the donated items along with the fair market value of each item claimed on the list.
- Promises to pay and pledges to a charitable organization. Once the pledge has been paid it then qualifies as a charitable donation for tax purposes.
- The purchase of charitable fund-raising tickets. Lottery and raffle-based tickets that taxpayers purchase when sold by charitable organizations as part of their fund-raising do not qualify as a tax deduction.
- The cost of tickets to attend a charitable event. However, the amount of the ticket price that exceeds the value of the service or meal that is received by the attendee would qualify as a charitable tax deduction. The charitable organization should provide the attendees of the event with the amount paid for the ticket that is in excess of value received – that portion of the cost will qualify as a charitable tax deduction.
- The value of a week’s stay at your vacation rental home that you donate to a charity auction event. Although you would be able to determine the value of the free week of use of the rental being donated, the IRS does not allow a tax deduction for “less than an entire interest” in a property. Because you are only donating one week’s use of the property, this donation would be considered a “partial interest” and would not be a qualified charity deduction. And conversely, the purchaser of the week’s rental use at the charity auction would only be allowed a charitable tax deduction for the excess of the price paid for the auction item above the market value of the week’s rental.
- The value of your time or services while volunteering your time to a charitable organization.