Is Your Charitable Gift Tax-Deductible?
By Wayne Schoene–
Every year, people come to me and ask me if the cash donation they made in the previous year is eligible for a tax deduction. As I look over the receipt and ask questions, I can see the apprehension in their eyes. After all the relevant facts are known, I can tell them that if it is fully deductible, partially deductible or not deductible at all. The fully or partially response usually elicits joy and happiness. The not at all response usually elicits anger and dismay.
My personal belief is that people should find out whether a cash donation is eligible to be a charitable contribution tax deduction before they write out their check or submit their debit or credit card number– especially when the dollar amount of the donation is substantial to them.
Charitable donations to Save the Children, which has programs in Uganda, are tax-deductible.
To be deductible on your tax return as a charitable contribution your donation must be made to a “qualified organization.” The federal government has 5 different types of “qualified organizations.” The first and most common type of “qualified organization” is one which is organized and operated only for religious, charitable, educational, scientific and literary reasons, or for the prevention of cruelty to children and animals.
It is very important to note that to be a “qualified organization” the entity you’re giving to must be organized or created in or under the laws of the United States, any state of the United States, the District of Columbia or any of the possessions of the United States (i.e. Puerto Rico, Guam, etc.). The other four types of “qualified organizations” are more complicated, and beyond the scope of this article.
To illustrate this point, here is an example below.
Example:
Emmanuel gives a $50 check to a public health charity, which is a “qualified organization.” This entity combines his donated funds with others for use in a malaria prevention program in Uganda. John has done a good deed, and will be eligible for a $50 charitable contribution deduction on his federal tax return.
Example:
Cindy gives a $50 dollar donation to a local Ugandan charity that helps support street children in Kampala. The charity is not a “qualified organization,” since it not based in the United States. Cindy has also done a good deed, but will not be eligible for a charitable contribution deduction on her federal tax return.
Cindy gives a $50 dollar donation to a local Ugandan charity that helps support street children in Kampala. The charity is not a “qualified organization.” Cindy has also done a good deed but will not be eligible for a charitable contribution deduction on her federal tax return.
IRS Publication 526 lists three ways to find out if an entity is a “qualified organization.” The first way is just to ask the entity if it is a “qualified organization.” A second way is by using IRS Publication 83. This publication lists most but not all of the “qualified organizations” on a searchable website and can be found on the web at http://www.irs.gov/app/pub-78/ . Lastly, the IRS says you can call 1-877-829-5500 and ask them if an entity is a qualified organization.
Sometimes when you make cash contribution, the organization provides you with a thank-you gift for your generosity. If the gift is something more than a “token item,” the cash donation must be reduced by the fair market value of the gift to determine the tax deductible portion of the charitable contribution. Except in certain situations, a “qualified organization” must give you a written statement when your donation is over $75 and your gift is both a contribution and for goods and services.
Example:
Michelle gives $500 to her alma mater, Boston University, a “qualified organization.” As a thank you, Boston University sends Michelle an alumni sweatshirt that it sells in its campus bookstore for $50. In addition, Michelle receives an acknowledgement letter from Villagetown that says they received a $500 gift from her, and that the tax-deductible portion of her gift is $450.
Example:
Mark attends a charity auction. All the proceeds from the auction go to his community church, a “qualified organization.” During the event Mark places a $125 bid for a case of wine with a $150 fair market value. Nobody bids higher, so Mark writes out a check to the church for $125, and leaves the auction with the case of wine. Later, Roadside Community Church sends him a letter that acknowledges the $125 gift and thanks him for it. In the letter, the church explains that none of the gift is tax deductible since the fair market value of the item purchased is greater than amount of the gift.
About the author:
Wayne Schoene is a Certified Public Accountant based in San Jose, California.
You may reach him at wayne@iellp.com.
Disclaimer:
Unless, expressly stated otherwise in this article, (1) nothing contained in this article was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by the taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained in this article relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend and federal transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this article. No one without our express written permission, may use any part of this article in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.
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