Deductions for Charitable Contributions
Donations made to charitable organizations are one of the most widely utilized income tax deductions. There are many regulations regarding what is defined as a charitable organizations, as well as the various types of contributions and how much an individual can deduct.
Tax Deductions for Charitable Contributions
For many donors, the question of deductibility involves whether or not gifts are made to qualified charitable organizations. In short, the organization must be nonprofit with a tax-exempt designation of 501(c). The most common designation is a 501(c)(3) but this is one of several which recieve tax-exempt status. There can be no plan to make profits for the organization or for any shareholder; the organization cannot spend significant time lobbying for legislation; and it cannot participate in political races.
Organizations may be public or private, and they may be umbrella organizations that distribute funds to other groups. Educational, scientific, public health and religious groups all qualify in addition to direct charitable organizations.
Other qualified groups include cemeteries, fraternal lodges and nonprofit veterans' groups; however, different deduction limits apply. Government contributions may be deductible if they're made solely for public, charitable benefit. The IRS website offers a Select Check Tool to determine whether an organization can receive tax-deductible donations. Note: A receipt or other documentation is necessary for contributions over $250.
Donations to any organization, business or individual that seeks profit are not deductible. For example, donations for private projects, including artistic endeavors, are not deductible unless made to a group with 501(c) designation.
Donations with Benefits
If a donor receives any sort of service or product in return for a contribution, only part of the gift is deductible. The organization should note the fair market value of an event or object at the time of purchase. For example, a fundraising dinner that costs $500 may have a fair value of $100 for the actual services and meal. Therefore, only $400 of the donation is deductible. Items sold or auctioned with the intent of giving the proceeds to charity carry the same restrictions.
There is no formula to determine fair market value, but the IRS suggests that you consider a few factors when making an estimate:
- How much did you pay for the property?
- How long have you had it?
- What is its condition like?
- How much would it cost to replace this property?
- How much would a similar item sell for?
The IRS provides further instructions on how to value donated property in Publication 561.
Someone who donates a service for charity cannot deduct the value of that service because it's considered volunteered time. Unreimbursed expenses related to the service are deductible but childcare costs are not. For example, if a lawyer who normally charges $300 an hour donates eight hours of his time to help people needing legal assistance, he cannot deduct his normal fees or the cost of childcare during that time; he can deduct the cost of travel and lodgings.
Donations of personal property, including clothing, furniture and household goods, may be deducted at fair market value if the items are in at least "good" condition. Items not in good condition must be valued at more than $500 with a verified appraisal to qualify for a tax deduction. Also, full property ownership is required; partial interest doesn't count.
Vehicle donations, including cars, planes and boats, have special rules. In general, if the fair market value is more than $500, the donor can deduct either the amount the organization receives from the vehicle's sale or the fair market value on the date of the contribution, whichever is smaller. The IRS details exceptions and further regulations, including increases or decreases in value.
Donations of real property, such as buildings or land, carry very specific regulations, including whether the donation goes to a conservation project or would have yielded capital gains from the sale.
In most cases, an individual can deduct donations totaling up to 50 percent of his or her adjusted gross income (AGI) in any year. This applies to donations to public charities, private operating foundations and private organizations that redistribute funds to other groups. Donors may deduct up to 30 percent of their AGI for contributions to fraternal lodges, veterans' groups, cemeteries and some private foundations. If donors contribute more than the allowable amounts in a particular year, they can often carry over the excess and deduct it the next year. Note: Donations to foreign organizations are usually not deductible.
Charitable Contribution Carryover
When you have donated more than your allotted amount for the year, you can carry over amounts that you were not able to deduct this year. This allows you to take the deduction in a subsequent year. You may be able to continue to deduct for the next five years if you reach your limit in consecutive years as well.
The same limitations that applied to the charitable contribution in the first year will apply in later years. You can read more about charitable deductions, limits and get additional information on carryovers by reading IRS publication No. 526.