Charitable Giving: How Do You Know What’s Tax-Deductible? Tax day is looming; now’s the time to gather all of your receipts to start itemizing charitable donations you have made over the year. You have kept all of your records, so imagine your surprise when a donation you made to a non-profit isn’t allowed as a deduction. The organization was a non-profit, but the deduction is still not allowed under the current tax code. You thought all donations to non-profit organizations were tax-deductible.
So how do you know which donations to non-profits are tax deductible and which are not?
First, it’s helpful to have some understanding of what, exactly, a non-profit organization is.
The Difference Between 501(c)3 and 501(c)4: (They’re Not Star Wars Droids)
To become federally-recognized as tax-exempt, it’s not enough for an organization to buy a domain name with “.org” on the end. The federal government has an extensive process whereby organizations apply for federally-recognized non-profit status. There are several different types of non-profit organizations recognized by the federal government, but not all of them offer tax-deductions.
Non-profit organizations recognized by the federal government offer tax-exempt status from federal, state, and property taxes. In some cases, these organizations also offer tax deductions for people who donate money or items.
There are 29 different types of tax-exempt organizations; here are two of the most common:
- 501(c)(3): These organizations are the most well-recognized type of federally-recognized non-profits. These non-profits include those that have a charitable, religious, educational, scientific, or literary focus. Other 501(c)3 organizations may focus on public safety, fostering amateur sports competition, or preventing cruelty to children or animals. Most donations to 501(c)3 organizations are tax-deductible.
- 501(c)(4): Known as a social welfare organization, 501(c)4 groups include civic leagues and political action committees (PACs). Unlike 501(c)3 organizations, donations made to 501(c)4 non-profits are not tax-deductible, with two exceptions: veteran organizations whose membership is made up of at least 90% vets, and volunteer fire departments.
There’s no doubt about it: the rules for what’s tax-deductible and what is not can be confusing. Here are six easy guidelines to keep it straight and get the most out of your charitable giving.
Rule #1: To qualify for a tax-deduction, you must itemize your deductions
To claim deductions to charitable organizations, you must itemize your deductions instead of claiming the standard deduction. For some people, this may end up being more trouble than it is worth. According to TurboTax, the standard deduction varies depending on your filing status.
In 2016, single taxpayers and those who are married but filing separately receive a standard deduction of $6,300. If your charitable donations for the year are a fraction of that and you have no other itemized deductions, a standard deduction may be better for you.
Rule #2: Research your charity before donating
Before donating, ask to see the charity’s tax-exempt letter from the Internal Revenue Service to make sure your donation is tax-deductible. You can also do a search on Charity Navigator to see how your money will be spent.
Tax exempt 501(c)(3) organizations are strictly prohibited from political involvement. If a non-profit in question is involved in political campaigns or lobbying efforts, they are not a 501(c)(3) entity, and your donation to their organization is NOT tax deductible.
For this reason, organizations like Greenpeace represent themselves as two separate entities, and your donations to only one of them, Greenpeace Fund, Inc., is a tax deduction. (Explained further in our post about the best environmental charities to donate to)
Donations to churches, temples, synagogues, and mosques are automatically tax deductible, even if they don’t show up on the IRS’s search for tax-exempt organizations.
Before giving, it pays to do your homework, as you might get the added benefit of a tax write-off depending on exactly who you write the check to!
Rule #3: Ask for (and save!) a receipt
Reputable charitable organization will automatically offer a receipt for donations of any amount. For donations over $250, a receipt is required. While these receipts do not have to be sent to the IRS, they are invaluable in case of an audit.
In some cases, you may want to donate to an organization that is in the process of applying for federal tax-exempt status. While you cannot deduct the donation until they receive it (which can take up to three years), once they do receive tax-exempt status, all donations are eligible back to the date that the organization applied. So keep those receipts!
Rule #4: Gifts to individuals, no matter how deserving, do not qualify
We have all seen the GoFundMe fundraisers to help families with outstanding medical bills or in case of a tragedy. As deserving as these folks may be, your gift to them through sites like GoFundMe is exactly that: a gift. You cannot write off giving to individuals, no matter how charitable or badly needed the gift is.
In some cases, these types of tragedies may be supported by federally-recognized tax-exempt organizations like the Red Cross. Giving through these organizations (instead of through a GoFundMe page) is tax deductible.
Rule #5: Giving that offers reciprocity is not tax-deductible
Attending a charity auction, supporting your child’s school by purchasing wrapping paper or cookie dough, and buying merchandise to support a cause are all examples of things that are not tax-deductible. The IRS sees this as reciprocity: you have received something in return for your gift, making it more an exchange of goods and less a charitable gift.
If you want to support a cause or organization and receive a tax deduction, you can certainly attend the fundraiser or buy the candles your neighbor’s child is selling. But you will also need to make a check out directly to the school as a separate donation to take a tax deduction.
Rule #6: Give on time
To take advantage of a tax deduction, make sure your donation is made by December 31st of that tax year. Otherwise, it will have to go on the next year’s return.
The final and best rule of thumb when making sure your charitable contributions are tax deductible? Ask. Any charitable organization worth its salt will be happy to provide confirmation of their eligibility when you ask.
Your turn: Have you ever been surprised by a contribution that was not tax-deductible?
Post written by Suzannah Kolbeck
*If a professional does your taxes, they should check to see if the organizations you have given to are tax-deductible. If you use tax preparation software like TurboTax Deluxe and H&R Block products, you’ll want to see if your donations are write-offs before itemizing them as deductions.