If you donate to a charity that qualifies as tax-exempt under the Internal Revenue Code, you can deduct the amount of your deduction from your taxable income within certain limits. This deduction applies not only to cash donations, but to donations of corporate shares as well. You must carefully document the value of donated property.
Not all donations to tax-exempt charities are tax deductible. You must donate to a nonprofit charity that qualifies under Section 501(c)(3) of the Internal Revenue Code. Generally, the charity must have applied for 501(c)(3) status and received an IRS Determination Letter approving the application before donations are tax-deductible. Churches are an exception to this rule, however. You can deduct donations to a church even if it has not applied for 501(c)(3) status. Most churches have applied for and received approval, however. If you donate to a church that the IRS later determines doesn't meet the legal requirements for 501(c)(3) status (by operating at a profit, for example), the IRS might retroactively revoke your deduction.
A donation of property, as opposed to cash, is generally valued at its fair market value -- the amount for which it could have been sold to a willing seller with sufficient knowledge of the facts surrounding the transaction. If you held your stock for a year or less before donating it, however, you must deduct any appreciation in its value before deducting the value of the donation from your taxable income. In most cases, you may deduct the full value of the stock, including appreciation, if you held the stock for more than a year before donating it. Narrow exceptions apply to this rule, however.
You must itemize your deductions to deduct charitable donations of stocks on your federal income tax return. This means that you can't take the standard deduction. Generally, you may deduct amounts of up to 50 percent of your adjusted gross income for donations to a 501(c)(3) charity. Deductions for donations to most private foundations, however, are limited to 30 percent of your adjusted gross income. A private foundation is a non-profit charitable organization that receives most of its income from investments and endowments, and donates mostly to other organizations rather than to the general public.
If you contribute stocks worth at least $250 to a single charity during any one tax year, the charity must provide you with a written acknowledgement that lists the contribution and the date it was made. This applies whether you made a single gift of $250 or more or several gifts that totaled at least $250 in value. In addition, you should keep any other documentation related to the transfer of stock in case of an IRS audit. It is particularly important to carefully document the fair market value of the stock at the time of your donation.
- IRS: Publication 526, Charitable Contributions
- IRS: Substantiating Charitable Contributions
- IRS: Exemption Requirements - Section 501(c)(3) Organizations
- IRS: Determining Fair Market Value
- Twin Cities Law Firm: Must Churches File Form 1023 for 501(c)(3) Tax Exemption?
- Better Business Bureau: Charitable Donation Tax Deductions
- A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com