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.
Not all “charities” are exempt organizations
The first thing you should be aware of 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, and 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.
Receiving value for donations
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 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 possibly 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 the bid you won with 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.
Limitations based on your 1040
Yet another problem when it comes to deducting charitable donations 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 value of anything you give (in terms of giving goods), but that’s how it works.
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.
Pet Adoption Fees Aren’t Deductible
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.
Your Small Business Donations (Likely) Don’t Count
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!
Donations To Individuals Aren’t Tax Deductions
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 be qualify for deduction, the 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.
Even when it comes to disaster relief, according to IRS Publication 526:
…you can’t 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!
Only The Person Giving A Donation Get A Deduction
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.