Yes, the calendar pages continue to fall off and end of the year is fast approaching.
Soon, the Thanksgiving and Christmas (Hanukkah too) holidays will be upon us.
With that come the letters and phone calls and events looking for your charitable donations.
And, in many instances, you can claim those donations you make on your tax return.
That is, of course, if you itemize, but more on that later.
Even if you can’t get the tax break, it is still a nice thing to do for others who may be less fortunate.
But, things are not always as they appear…
DISCLAIMER: THIS APPLIES TO NOT ONLY TO CASH DONATIONS BUT NON-CASH DONATIONS AS WELL. REGARDLESS OF WHAT YOU ARE DONATING, ALL OF THESE RULES WILL APPLY ACROSS THE BOARD!
1. Your Tax Return Determines Your Deductions
The first problem you may run into when trying to claim a tax deduction for any of the charitable contributions you made during the year is your tax return itself.
You must itemize your deductions in order to take a deduction for any donations.
Go ahead, look at the first two pages of the 1040.
You will see no reference to charitable donations anywhere, except for Schedule A.
That means if you take the standard deduction, you get no benefit.
It seems like a such a simple thing, but the recipient organizations probably think it will scare people out of donating if they advertise something like:
Your gift is tax deductible…but only if you itemize!
And, of course, they also don’t tell you that you will never be able to deduct the full original cost of anything you give (in terms of giving goods), but that’s how it works.
On top of that, the most you will be able to deduct on your tax return is 50% of your adjusted gross income depending on the type of donation you make.
So, if you gave money from savings or from a stash of old belongings you wanted to clear out, you may not be able to take all of it this year if your AGI wasn’t high enough.
There is a bit of good news, though!
If your contributions were limited due to your AGI, then you can carry the remainder forward for up to 5 years.
Sadly, this only pertains to the excess contribution limitation, it doesn’t count for previous years’ donations when you took the standard deduction and can now qualify to itemize 🙁
2. Not All “Charities” Are Exempt Organizations
Yet another problem when it comes to deducting charitable donations is not everyone that comes knocking at your door represents a viable charity.
Unless the organization is an IRS section 501(c)(3) exempt organization, the donation is not legally deductible.
It may not make sense to some people as to why there is a distinction here, but the answer is quite simple: qualified charitable organizations do not pay taxes, and therefore are held to strict IRS guidelines relating to their reporting of information and how the monies they collect are used.
Then you need to be aware of yet another distinction.
There is a difference between “tax-exempt” and “exempt organization”
Public schools, for example, are government entities and therefore “tax-exempt”, meaning they don’t pay taxes.
BUT just because it’s tax-exempt doesn’t automatically make it an “exempt organization” for IRS and tax deduction purposes.
This means that unless your kid’s school, it’s PTA, sports teams, etc are individually or collectively recognized as 501(c)(3) organizations, you cannot deduct any money given to them regardless of the intended purpose.
The same goes for little leagues of all kinds as well as many other civic groups.
Just being a publicly run and funded organization doesn’t automatically grant them exempt organization status.
Any group or organization must apply before it can present itself as such and declare your donations to be “tax deductible”.
So, just because a little kid wearing a baseball uniform knocks on the door, or someone sets up a table in the mall handing out religious blessings in exchange for cash, they are not always legitimate, recognized charitable organizations for the purpose of claiming a tax deduction.
The IRS has a database you can search to check up on any organization you may be thinking about donating to.
The Federal Trade Commission also has charitable giving resources to help educate and protect you.
3. Receiving Value Negates Deductibility
Another big issue arises when it comes to charity events.
You have undoubtedly heard about dinners where a portion of the per-plate cost goes to a charity, yes?
Or a special event at a hot-spot or cultural location where a charity will be helped?
Or even a raffle/auction/bingo to help raise funds.
Well, I’m sorry to inform you that many of these instances are not considered donations (or at least not entirely).
See, the way it goes is, you have to give up something of value in order for it to be considered a qualified donation.
When you get something of value, it’s essentially a purchase transaction, so you lose any or all of the possible deduction.
Here are examples of the three most common scenarios:
- You go to a charity dinner event which costs $500 per plate. Since you are actually receiving a meal in exchange for that donation, you can only deduct the portion of your donation that exceeds the cost of the meal.
- You go to an event with an auction in which all proceeds go to charity. You bid on and win a cruise for 2. The cruise has a retail value of $1,500 but your winning bid was only $1,000. You cannot deduct any of that money since you received something that had a higher value than your contribution.
- You open the mail and see a letter from your favorite charity and send them a check. A few weeks later you receive a thank you letter in the mail. The entire contribution is deductible because you did not receive anything of value (monetary value at least) in return for your gift.
Most organizations will include these caveats in their marketing materials, or in the receipt you receive.
The problem is that many people do not read the fine print on anything, so when they get to their tax preparer they are shocked when told about the disqualified portions.
Speaking of those “little things that surely don’t count in this discussion” such as raffles and bingo–IRS Publication 526 has something to say about those specifically (literally copied and pasted from the actual text on the website!):
You can’t deduct as a charitable contribution amounts you pay to buy raffle or lottery tickets or to play bingo or other games of chance
4. Pet Adoption Fees Aren’t Donations
I used to have a client that was very generous, giving lots of money to numerous charitable organizations.
Once he asked about deducting pet adoption fees from the Broward County Humane Society.
He said the person who processed the adoption told him that the fee was a tax deduction because it was a donation.
Boy was that is the furthest thing from the truth…
The way it works at this place (and many others like it) is you must pay a fee to adopt a pet.
The cost depends on the type and age of the animal.
That’s all well and good, except for one little fact:
You cannot adopt if you do not pay the fee.
What this means, is that the transaction is in no way a donation if it is a requirement to complete the process.
You see, it can be a fee or a donation, but not both.
If the payment is a prerequisite, then it is a fee and therefore not a tax deduction.
On the other hand, if the transaction is free but it is suggested that you make a payment of some sort to help them after-the-fact, then it is a donation, and thereby can be deducted (again, only if you itemize)
Remember, if you do not itemize on your 1040 return, then no donations are deductible.
Side note: This is only the case with ordinary house pet adoptions.
If you are a special needs person or have a dependent who is one, then the costs of those pets, the supplies, and care are deductible as medical expenses (again, if you itemize AND the expenses exceed the 7.5% floor for medical expenses, you can deduct the excess).
Also, you can deduct the cost to purchase and care for working animals such as guard dogs for your business.
You need to be careful if you do decide to donate to an animal shelter.
As I mentioned up in the first sub-heading, not all organizations are “exempt” when it comes to IRS standards and therefore donations to them aren’t tax deductible.
5. Your Small Business (Likely) Can’t Deduct Them
There are a lot of people who are misinformed about making donations through their businesses.
Because most small businesses are structured as sole proprietorships, single-member LLCs, or S-Corporations they pass the tax liability through to the owners/shareholders.
What that means is that they aren’t allowed to take deductions for charitable contributions because they don’t pay taxes.
The way it actually works is that you ignore donations made through your business.
Well, you do record it for book purposes, you just don’t use it on your Schedule C or the business return.
Again (and I’m sure people are tired of seeing this phrase), you have to itemize in order to take advantage of it on your taxes.
Otherwise, it’s just a line item on the profit and loss report for the business.
If you happen to run a C-Corp, then your business will be allowed to deduct charitable contributions (subject to limitations) since the business pays its own taxes!
6. Donations To Individuals Don’t Count
If you are the type of person who hands money to random needy people on the street, I applaud you.
I truly believe that it’s very kind and selfless of you!
However, I also have to be the bearer of bad news:
You can’t count any of that money toward your charitable donations.
Like I mentioned earlier, in order to qualify for the deduction, money has to go to a recognized exempt organization.
Unfortunately, even if they wanted to, individuals cannot gain that status.
In this case, the money you give is considered a gift, which you cannot deduct on your taxes even if you do itemize.
The same goes for crowdfunding campaigns to help people with medical bills…the money is going to an individual who is not considered to be a charitable organization.
Even when it comes to disaster relief, according to IRS Publication 526:
…you cannot deduct contributions earmarked for relief of a particular individual or family
That being said, if you know of an exempt organization which takes nominations for worthy recipients of assistance, then you are more than welcome to try and get an individual assistance that way.
Any money you give to that group would qualify as deductible!
Even if you don’t get the tax break, you do get karma points and your soul can feel good 😀
7. Only The Person Giving Gets A Deduction
This one may piss some people off.
Again, I’m just the messenger so don’t yell at me…please 🙂
If someone is going around collecting donations which they will then turn over to some charity all of the people who contributed to the fund are left out in the cold.
It also means that if someone makes a donation in your name, you cannot claim the deduction.
The only person who can claim a tax deduction is the person who actually makes the donation, meaning the one who turns the money into the charity.
Ultimately, the responsibility falls on you, the taxpayer, to make sure that you know what you are doing before making any kind of donation.
Call the organization, call your tax preparer, call the IRS taxpayer advocate if you have to.
Do anything to make sure that you have all the information necessary to make the right choice.
It’s not such a bad idea to seek help on something you’re not 100% sure about.
And, it’s better to file correctly the first time than risk a fraudulent deduction upon audit down the line.
What’s been your experience making charitable donations? Has anyone ever told you that a donation wouldn’t be deductible? have you ever “cheated” on these rules–knowingly or not? Were you even aware that these rules existed before reading this?