Americans are charitable people. There are many different types of philanthropy. Some involve giving of one’s time, some involve giving of cash and some involve giving of property. Americans, by most forms of measurement are the most philanthropic of any country. Studies show that nearly 75% of charitable giving in the United States is made by individuals (versus corporations, etc.). While most charitable giving is reported to be made to religious based organizations, there are thousands of non-religious charitable purposes. One never has to look far to see someone in need or a worthy cause.
Our Federal Government encourages philanthropy. Among the ways that philanthropy is encouraged is through tax incentives. A charitable contribution made during one’s lifetime may result in a Federal Income Tax deduction. A charitable gift made as a result of one’s death may result in reduced Estate Taxes.
This article discusses the Income Tax laws relating to charitable giving. While the Federal Government provides tax incentives, taxpayers must know the rules to understand whether and to what extent a tax benefit may be obtained.
The Federal Government does not tell you that you must be charitable or which charity to support. However, if you want to take an Income Tax deduction, the charitable organization that you give to must be “qualified”. To be qualified, it must be on the list of qualified organizations maintained by the IRS. The only way to know, for sure, is to check the IRS’s “Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986”.
Briefly, a non-profit organization must obtain written approval from the IRS in order to be a qualified charitable organization. The determination of whether the organization is qualified is based on certain criteria set forth in the income tax laws (e.g., approved exempt purpose, no racial discrimination, not a terrorist organization, etc.). An organization does not get on the IRS list merely by meeting those requirements. The organization must have prepared and filed documents with the IRS and received IRS approval. Once obtained, the organization must then continually maintain that qualified status and, from time to time, organizations that once qualified are dropped from the list. If the organization is not qualified at the time that you make your contribution, you cannot deduct contributions made to that organization, regardless of how worthy the cause may be.
The types of organizations that might qualify include:
- Federal, state and local governments.
- Religious organizations
- Non-profit schools, hospitals and volunteer fire departments.
- Public parks and recreational facilities.
- Public charities (e.g. Red Cross, United Way, Goodwill Industries).
The types of organizations that will not qualify include:
- For profit organizations.
- Groups that lobby for changes in the law.
- Political groups or candidates.
- Country clubs and lodges.
- Terrorist organizations.
For example, giving $100 of cash or clothing to a family who’s house burned down is a clearly a charitable act. However, there is no tax deduction available for this type of charitable gift. However, if that same taxpayer gives $100 of cash or clothing to the Salvation Army and the Salvation Army then gives the gift to the same unfortunate family, the taxpayer may be entitled to a deduction.
Types of Contributions:
Some types of contributions to qualified charitable organizations may be deducted and others may not.
The following types of contributions may give rise to a deduction:
- Cash (e.g. cash, checks, credit cards);
- Property (e.g. securities, land, food, equipment, furniture, clothing)
- Travel (e.g. transportation, meals, lodging, mileage)
The following types of contributions do not give rise to a deduction even if made to a qualified charitable organization:
- Games of chance (e.g. raffle tickets, lottery tickets, bingo games);
- Tuition (however, there may be Income Tax benefits available other than as charitable contributions).
- Time (i.e. you are given no Income Tax benefit for giving your time or for the value of one’s services).
- Body Parts and Fluids (e.g. kidney’s, blood).
Taking The Deduction:
Individuals that have contributed to qualified charitable organizations reflect these contributions as an Itemized Deduction on Schedule A of their Individual Income Tax Return (Form 1040). A taxpayer who donates property (other than cash) in excess of $500 must complete an additional form called “Noncash Charitable Contributions” (Form 8283). The total from Form 8283 is then reflected on Schedule A.
It should be noted that if a business makes a qualified donation they are entitled to a tax benefit. Corporations taxed under Subchapter C (i.e. not Subchapter S Corporations) take the deduction on their Corporation Income Tax Return (Form 1120) subject to certain restrictions and limitations. Subchapter S Corporations and Partnerships do not take the deduction but flow the charitable contribution deduction to the shareholders via Schedule K-1. Limited Liability Companies can elect to be taxed under Subchapter C, Subchapter S or as Partnerships and follow the appropriate treatment based upon their elected form of taxation.
The Amount of The Deduction:
For the most part, the deduction is based upon the Fair Market Value (“FMV”) of the contribution. The FMV of cash, checks and contributions put on credit cards are, of course, dollar for dollar. The FMV of property contributions must be determined by the taxpayer and may be subject to reductions as discussed more fully below.
Limits and Restrictions:
Making an eligible contribution to a qualified charitable organization does not mean that you can get a tax benefit for the contribution. There are a variety of limits and restrictions including the following:
Itemizing Verses Standard Deduction:
A taxpayer must have sufficient Itemized Deductions in order to exceed the “Standard Deduction” allowed under the Federal Income Tax laws. That is, you are allowed to take the Standard Deduction even if you have no Itemized Deductions. If your total itemized deductions in any particular year to do not exceed the Standard Deduction for that year, in effect, you get no Income Tax Benefit for having made the contribution. For this reason, some taxpayers will bunch up their charitable contributions into a single year rather than spreading them over a period of years.
Benefit to Taxpayer:
A taxpayer cannot take a deduction to the extent that they receive a benefit. The tax deduction must be reduced by the FMV of the benefit received by the taxpayer. For example, a taxpayer pays $100 to a qualified charitable organization for a benefit dinner and it is determined that the FMV of the dinner itself is $25. If the taxpayer attends the dinner, the taxpayer may be entitled to deduct $75 ($100 less the $25 FMV of the dinner). If the taxpayer does not attend the dinner, they should be entitled to deduct the full $100. If a taxpayer receives some benefit, the charitable organization is required to provide a written statement of the deductible amount.
The amount of deductible charitable contributions may be limited based upon the taxpayers Adjusted Gross Income (“AGI”) in the year of the contribution. Most contributions are limited to 50% of a taxpayer’s AGI. However, some are limited to 30% of the taxpayer’s AGI. For this purpose, AGI is computed without regard to net operating loss carrybacks, if any. The determination of whether the 50%
or 30% limitation applies is based upon the IRS’ classification of the charitable organization. Some charitable organizations will provide you with their applicable percentage. If not, a taxpayer can find the classification for that organization on the IRS’ website. To the extent that your contribution deduction is limited, you may be allowed to carry the deduction forward for up to 5 years.
Appreciated Property and Depreciated Property:
Special rules apply where a taxpayer contributes appreciated property or where the taxpayer has taken depreciation deductions for the contributed property.
Taxpayers are required to substantiate the charitable contributions. That is, they must be prepared to “prove” to the IRS that they made the contribution, when they made the contribution, and the deductible amount.
All Cash Contributions:
For any cash contribution a taxpayer must have either:
- Bank records (e.g. cancelled check or account statement) or
- A written acknowledgement from the charitable organization documenting the amount and date.
Cash Contributions of $250 or Greater:
The law requires more substantiation where there are charitable contributions of $250 or greater made to a particular charitable organization in any one day. For these, bank records alone are not sufficient. A written acknowledgement from the charitable organization documenting the amount and date is required. If the contributions are made through a payroll deduction plan, a Form W-2 or other employer provided document may be used in place of the charitable organization’s written acknowledgment.
The law imposes additional requirements where a taxpayer contributes property (i.e. noncash contributions).
(1) Taxpayers must obtain and keep certain information for property contributions, including the following for each separate donation:
- Name of charitable organization.
- Address of the charitable organization.
- Description of the property contributed.
- Date of the contribution.
- How the taxpayer acquired the property.
- The taxpayers’ cost of the property donated.
- The FMV of the property on the date of contribution.
- How the taxpayer determined the FMV.
(2) If the property contributions exceed $500, the taxpayer must prepare and attach Form 8283 to their Form 1040 listing out the above information.
(3) If a taxpayer is claiming a property deduction in excess of $5,000, the taxpayer must obtain a written appraisal. The cost of the appraisal is not deductible.
(4) Special rules exist where a taxpayer donates a motor vehicle (e.g. car, boat, airplane, etc.)
Many taxpayers assume that they are entitled to deduct all contributions to organizations that sound like they might be philanthropic. They also assume that their contributions will all give them a tax benefit. When preparing income tax returns, most tax preparers assume that the taxpayer has determined whether the organization qualifies and the deductible amount of the contribution. Of course, not all charitable giving is done in order to obtain an Income Tax benefit. However, if a taxpayer wants to obtain an Income Tax benefit, they must understand and follow the rules.
Copyright ©, Keith B. Baker – 2010
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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