Monday we began our discussion on itemized deductions by talking about mortgage interest and Tuesday our attention turned to the types of taxes that are deductible. Today we are going to discuss charitable donations.
Generally, taxpayers can receive a tax deduction for contributing to a §501(c)(3) organization. IRC §170(c), defines a charitable organization, generally as, trust, funds, foundations, or other entities organized for and operated exclusively for religious, charitable, scientific, literacy or educational purposes. You can check to see if the organization that you are contributing to is organized under these provisions.
The deductions to the organizations can include cash, property, and out-of-pocket expenses performed for volunteer work. One thing to note is that the IRS says that the time you donate is not deductible. Generally, the full values of these donations are deducted on Schedule A, subject to certain limitations based upon the taxpayer’s adjusted gross income (AGI) or capital gain property. If there are any excess contributions, they are carried forward five years.
The most common Non-Profit Organizations are foundations and public charities. The difference between foundations and public charities is that private foundations receive support from a small number of individuals and corporations and exist to provide grants to public charities. On the other hand, public charities are better known since they are funded and operated by the public. Now that we know the background, let’s get into the nuts and bolts.
Under IRC §170, contributions to charitable organizations are deductible, with some limitations, if the contribution is made to any of the following:
1. A State or possession of the United States.
2. A domestic corporation, trust, or community chest, fund or foundation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes
3. A post or organization of war veterans
In addition, IRC §170 imposes several restrictions on a taxpayer’s deduction of charitable contributions. Generally there is a limitation on the deductibility of contributions based on a taxpayer’s AGI. No Deduction is allowed in excess of:
1. 50% of a taxpayer’s AGI
2. 30% of a taxpayer’s AGI for appreciated capital gains property
3. 20% of AGI for appreciated capital gain property to private non-operating foundations that are not classified as public charities
An individual that contributes capital gain property can make an election to reduce the value of the contribution to the basis of the property and apply the 50% of AGI limitation. The general rule of the contribution is:
1. For long term capital gain property, the contribution is normally the fair market value (FMV) of the property
2. For property that would yield ordinary income if sold, the value is the FMV “less the amount of gain which would not have been long term capital gain”
In addition, for a full deduction, tangible property, excluding real estate, must be given to an organization with related use.
Other general rules for deducting gifts to charity are as follows:
- You must actually donate the cash or property to the organization. A pledge or promise to donate is not deductible
- As stated above, you must donate to a qualifying §501(c)(3) organization. If you are unsure if the organization that you are donating to is a qualified charity under §501(c)(3) you can search the IRS’s database at www.irs.gov
- You must be able to itemize your deductions
- You must keep good records. Typically in exchange for you donation, the charity will give you receipt.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, and The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle
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