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

By Mark Kennan

Contrary to popular belief, tax laws aren’t designed just to raise revenue to fund the government. Tax policies are also designed to encourage or discourage certain behaviors. To encourage donations to nonprofits, also known as 501(c)(3) organizations, Uncle Sam gives you a break on your taxes for making donations.

Claiming Charitable Donations

You can only deduct contributions to qualified charities. Qualified charities include organizations created for religious, charitable, educational, scientific or literary purposes. It also includes organizations that prevent violence to children or animals. (526, p. 2-3) Only people who itemize their deductions can deduct their donations to 501(c)(3) organizations. Though anyone can elect to itemize, it’s not always in your best interests. You should itemize only if your itemized deductions, including charitable donations, exceeds the amount of your standard deduction. When you itemize, you have to report the donations on Schedule A. After totaling your itemized deductions, you have to report the total on your Form 1040 tax return.

Donations That Cannot Be Deducted

Just because you gave something away doesn't mean you qualify for a deduction. If you made a donation to a specific individual or a nonqualified organization, you can't claim it on your taxes. For example, if you paid tuition for someone you felt was a deserving student, you can't take a deduction. You also can't deduct the value of your time or personal expenses. For example, if you spend all day helping repair a homeless shelter, you can't deduct what you would have charged if you were doing it for pay, nor can you deduct what you spent on your lunch that day.

Ready to form a nonprofit? Get Started Now

Limits on Deductions

Each year, your deduction for your charitable contributions cannot exceed 50 percent of your adjusted gross income. In addition, if you’re donating appreciated property, such as stocks or land, you’re limited to a 30 percent of your AGI for donations to most organizations. Donations to certain 501(c)(3) organizations, such as veterans’ organizations, nonprofit cemeteries or fraternal societies, are subject to a 30 percent limit. These are known as 30 percent limit organizations. If you contribute appreciated property to a 30 percent organization, you're limited to 20 percent of your AGI. For example, if you donate appreciated stock to a nonprofit cemetery, your deduction couldn’t exceed 20 percent of your AGI. If your donation exceeds the limits, you can carry over the extra up to five years in the future.

Valuing Deductions

The amount you can deduct generally equals the dollar amount you contribute or the fair market value of the property you donate. The fair market value of property is the price at which a buyer and seller would agree. However, there are several important exceptions when donating property. First, if you’ve had the property for less than a year, you can’t include any of the gain in value. For example, if you bought stock last month, its value increased from $3,000 to $4,000 and then you donated it, your deduction would only be $3,000. Second, if you donate tangible personal property, such as artwork or coins, and the charitable organization is just going to sell the property, you can deduct only the amount you paid for the items. Finally, household items, such as clothing, generally must be in good or better condition to qualify for the deduction.

Ready to form a nonprofit? Get Started Now
How to Donate Self Storage Space to 501C3 Nonprofits

References

Related articles

Are Nonprofit Raffle Ticket Donations Tax Deductible?

For the purpose of determining your personal federal income tax, the cost of a raffle ticket is not deductible as a charitable contribution. It may be deductible as a gambling loss, but only up to the amount of any gambling winnings from that tax year. If you donate property to be used as the raffle prize itself, its value may be deductible as a charitable contribution.

501(c)(3) Regulations for Animal Rescue in Illinois

Sometimes the Internal Revenue Service and basic human kindness find common ground. The federal government classifies animal rescue operations and shelters as “not for profit” organizations. In Illinois and elsewhere, this increases the likelihood that individuals make donations that allow the organizations to continue saving animals.

Can Our Firm Write Off Legal Services Provided to a Charitable Organization?

Many law firms provide free legal services to charitable organizations on a regular basis, but this doesn’t always mean they can take a charitable contribution deduction for it. If you operate your own law firm or are a partner in one that provides similar legal services, it’s important that you understand when you can take a charitable deduction and which expenses you can include.

Doing the right thing has never been easier.

Related articles

Inheriting a 529

A 529 plan is a savings plan that offers tax benefits to a person saving for future higher education costs, including ...

Monetary Restrictions for Inheritance of the Disabled

If you’re planning your estate and you have a disabled child or other family member for whom you want to provide, the ...

Tax Implications for a Sole Proprietorship

When starting your own business, one of the most important decisions is how you want to organize your entity. The ...

Can You Claim Taxes on a Home in Puerto Rico That You Inherited?

If you inherit a home in Puerto Rico and plan on using it as a personal residence or rental property, you’ll inherit an ...

Browse by category
Ready to Begin? GET STARTED