How Do Donations to a 501(c)(3) Work in Taxes?

By Edward A. Haman, J.D.

How Do Donations to a 501(c)(3) Work in Taxes?

By Edward A. Haman, J.D.

The Internal Revenue Code includes provisions intended to benefit charitable organizations. Some of these provisions exempt the charity from paying federal taxes, while others are designed to encourage charitable donations by granting tax deductions to those who donate to charities. However, there are limitations on the deductibility of such donations.

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Qualified Charities

In order for someone to obtain a tax deduction for a donation to a charity, the donation must be made to a charity that has been qualified by the Internal Revenue Service (IRS) as an approved charitable organization. If you plan to make a donation, you need to be sure the organization is a qualified charity. To help you make this determination, the IRS makes available a list of eligible organizations.

Such organizations are approved by satisfying the IRS that they meet the requirements of Section 501(c)(3) of the Internal Revenue Code. Individuals, political organizations, and political candidates generally do not qualify. For example, you cannot take a tax deduction for giving your nephew $5,000 to help pay for his college expenses. If the organization has not been approved by the IRS, you cannot deduct the donation.

Taking the Charitable Deduction

In order to claim a charitable deduction, you must itemize all of your deductions on the form Itemized Deductions (Schedule A) of your tax return. You cannot deduct a charitable contribution if you take the standard deduction on your tax return. This means that the total amount of your itemized deductions must exceed the amount of the standard deduction, which is $12,200 for an individual, $24,400 for a married couple, and $18,350 for a head of household, for the 2019 tax year. These amounts are slightly higher for seniors.

For example, if you are a single individual who donated $5,000 to qualified charities but your other permissible itemized deductions do not exceed $7,200, it is more beneficial to take the standard deduction instead of claiming the charitable contribution.

Deductions must be taken for the tax year in which the donation is made. This means when the check is put in the mail, when the property is delivered or title transferred, or when the donation is charged to your credit card—not when you pay the credit card bill.

If you received any benefit in return for the donation, you may not deduct the value of the benefit. For example, if you donate $100 to the Sierra Club and receive a backpack with a value of $20, your deduction is limited to $80. This is called a quid pro quo contribution and requires the charitable organization to provide you with a written disclosure stating the deductible amount if the total contribution is more than $75.

Documenting Donations

In order to take a deduction, you need sufficient documentation as proof. The form of the documentation depends upon the nature of the donation.

Cash donations. For a cash donation, you should have either a cancelled check or a receipt. The receipt is generally either a receipt from the charity, a bank account statement showing an ACH transaction, or verification of a credit card payment. If you signed up for periodic donations through a payroll deduction, paystubs or W-2 forms are acceptable. The record must show the date, name of the charity, and amount of the donation. A checkbook entry or other record prepared by the donor is not acceptable.

Property donations. If you donate property, you can usually deduct its fair market value. Clothing and household items must be in at least good condition. If the value exceeds $250, you need a receipt from the charity, with a description of the property, the claimed value of the donation, and whether any goods or services were provided for the donation. If the value exceeds $500, you need to file Noncash Charitable Contributions (Form 8283) with your tax return. If the value of the property exceeds $5,000, an appraisal of the property is required. If you plan to donate a vehicle, such as a car, boat, or RV, see the IRS publication A Donor's Guide to Vehicle Donation.

Contributions as a volunteer. If you perform volunteer work for a qualified charity, you cannot deduct the value of your time. However, you can deduct any expenses you incur in connection with your volunteer work, provided the charity does not reimburse you. Receipts or other documentation should be kept.

 

Generally, you may only deduct the equivalent of 60% of your adjusted gross income, although this limit is lower for certain types of property donations, such as property subject to capital gain. For more details about charitable deductions, you may wish to consult Charitable Contributions (Publication 526).

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