Tax Benefits for Donating to a 501(c)(3)
The federal tax code offers a tax deduction for contributing to charitable organizations, also known as 501(c)(3) organizations. The organizations aren’t operated for profit and include charitable, educational, scientific, religious and literary organizations, as well as organizations that exist to prevent cruelty to animals. The tax code does have limits on how much you can deduct and the records you have to keep, so knowing how the deduction works before you give can help you make sure you maximize your tax savings from your generous giving.
Estimating the Value of Donated Property
When you donate goods to charity, you’re generally limited to deducting the fair market value of the items. The IRS doesn’t have a single formula that you’re supposed to use to calculate the fair market value of the items, but you can look at what similar items are selling for at stores in your area for a good idea. If you’re donating used items, the fair market value is usually substantially lower than the original retail price. For example, if you’re donating used clothes or books, look at what a thrift store or Goodwill is selling similar items for to figure the amount of the deduction you’re entitled to claim on your taxes.
Donations of vehicles, including cars, boats and airplanes, are subject to different rules. If the charity uses the vehicle for its charitable purposes, you can deduct the fair market value. However, if the charity sells it, you’re limited to deducting the smaller of the fair market value or what it sells for at auction. For example, say you donate a car with a fair market value of $5,000 to charity. If the charity uses it as part of is mission, such as transporting kids to after-school activities, you can deduct the full $5,000. However, if it sells the car to raise money, and the car only sells for $3,500, you can only deduct $3,500.
Donating Property to a 501(c)(3)
If you are donating property to a non-profit that has increased in value, you might be able to take advantage of a double tax benefit for your contributions. To qualify, the appreciation must be treated as long-term capital gains if you were to sell the property instead of donating it. That generally means that you need to have held the asset, such as stocks, for more than one year. If you donate property that doesn’t qualify for long-term capital gains, such as stock you’ve held for a year or less or inventory, you can only deduct your basis for the property – what you paid for it – even if it has substantially increased in value since then.
If you qualify, you can donate the property directly to the charity. That way, you receive an income tax deduction for the full fair market value of the assets. Plus, you never have to report the appreciation as taxable income. For example, say you own stock that you paid $10,000 for and it has now grown to $15,000. If you sell the stock and then donate the $15,000, you will still get credit for a $15,000 donation. But, you’ll have to pay capital gains taxes on the $5,000 gain. If, instead, you donate the stock to the charity, you can claim a $15,000 tax deduction and avoid paying taxes on the $5,000 of gains.
Deducting Charitable Miles
If you have to drive as part of your charitable work, you can add the cost of transportation to your charitable contributions deductions. You can calculate the cost of gas and oil for your trips, or you can just use the IRS charitable mileage rate, which is 14 cents per mile as of 2018. For example, if you drive 100 miles to deliver meals to homebound people, you can add $14 to your charitable contributions deduction. If you opt for the mileage rate, you can still add the cost of tolls and parking to your deduction.
Understanding Non-Deductible Contributions
Sometimes, good deeds you do won’t result in an income tax deduction. First, you can’t deduct contributions you make to individuals, no matter how needy or deserving they are, or even if a charity would be able to offer the same assistance. For example, if you meet a very needy and deserving high school student and you offer to pay for her college tuition, you can’t claim a tax deduction for the contributions.
You’re also prohibited from deducting the value of your time to charity. For example, say that you deliver meals to the elderly for a charity for four hours each week. If the charity had to hire a Lyft driver to do the same task, it would cost $150. Or, pretend you have special skills as a plumber and you volunteer your time and expertise to fix the plumbing at a charity’s office that would have cost it $300 in expenses. In either case, you’re not allowed to claim the value of the charity work you do as a tax write-off. But, you could add the mileage you drive to your charitable deduction.
You’re also prohibited from deducting contributions to foreign organizations, political groups and groups that exist to lobby for changes to the law. And, of course, any group that is run for profit won’t qualify as a 501(c)(3) organization.
Itemizing to Claim Contributions
If you’ve made deductible contributions to a 501(c)(3) organization, the deduction is classified as an itemized deduction on your taxes. This means that you won’t get any credit for your contributions unless you itemize your deduction and give up the standard deduction. If you itemize, you may also get to claim several other deductions, including mortgage interest, real estate taxes, state and local income or sales taxes, and medical expenses, so you don’t need your charitable contributions alone to exceed the standard deduction.
Under the Tax Cuts and Jobs Act, the standard deductions for each filing status have increased substantially. For 2018, the standard deduction is up to $12,000 for singles, $18,000 for heads of household and $24,000 for married couples filing jointly. If the standard deduction for your filing status is larger than the sum of your itemized deductions, it doesn’t make sense to itemize, and you won’t receive any tax benefit for your charitable contributions.
Keeping Charitable Contribution Records
You’re required to keep documentation of your contributions in the event the IRS audits your return. You need to get the receipts on or before the earlier of the date you file your tax return or the date the return is due, including any extensions.
For cash contributions, the requirements are fairly straightforward in that you usually need a receipt from the charity acknowledging the contribution and stating what, if anything, you received in return for your contributions. For example, if you donated $150 and received a $20 gift card as a thank you for your donation, your receipt would show what you received in return and you would only be able to deduct $130. If your contribution is less than $250, you can also use a bank stub, credit card statement or canceled check to substantiate your deduction, as long as it shows the name of the charity, the date of the contribution and the amount you gave.
With donations of property, the rules are a little more detailed. If the donation is less than $250, you can get a receipt, but if it’s not practical, the IRS will also accept written records you make that show the name of the organization, date of the donation and what you gave. For example, if you drop off a bag of used clothes at a charity’s dropbox, you don’t need a receipt from the charity.
For donations in excess of $250, you must have a receipt from the charity detailing your donation. You should also keep records as to how you acquired the property, when you acquired the property and your cost basis for the property. For example, you might note that you inherited a painting from your dad’s estate at his death when it was worth $10,000. If you donate an item, or group of similar items, that are worth more than $5,000, you need to get a qualified appraisal to confirm the amount that you claim as an income tax deduction.
Understanding Qualified Charitable Distributions
If you are required to take minimum distributions from your IRA because you’re over 70 1/2 years old, you can divert up to $100,000 of that required minimum distribution to charity by using a qualified charitable distribution. The amount of your donation is paid directly from your IRA to the charity, without being paid to you first. That way, the distribution still counts toward your required minimum distribution for the year, but doesn’t increase your taxable income. However, because the contributions aren’t included in your taxable income, you don’t get to add the amount to your charitable contribution.
Using a qualified charitable distribution can save you money on your taxes in a few ways versus taking the distribution and making the charitable contribution. First, if you aren’t going to itemize your deductions, which is increasingly difficult with the higher standard deductions, you wouldn’t be able to deduct the contributions but you would be liable for the income taxes on the withdrawal if you took a distribution and then donated it all to charity. Second, by not having to report the distribution as taxable income, you lower your adjusted gross income, which can reduce the amount of your Social Security benefits subject to federal income taxes.
Limitations on Tax Deductions
The maximum amount you can deduct each year depends on the type of contribution you make to charity. If you contribute cash, you contribution is limited to 60 percent of your adjusted gross income for the year. If you contribute property, you’re usually limited to 50 percent of your adjusted gross income. However, if you’re donating appreciated property and claiming the deduction based on the appreciated fair market value, your deduction is limited to 30 percent of your adjusted gross income.
Carrying Forward Excess Deductions
If you’re not allowed to deduct all of your contributions in the year you make them, you can carry the excess forward to the following year. However, your contributions will expire five years after you make them and you’ll lose the ability to take a tax benefit. For example, if you make a cash donation of $50,000 to a 501(c)(3) but your adjusted gross income is only $70,000 during the year, you could only take $35,000 of the deduction this year. Then, you could deduct the remaining $15,000 the following year.
However, you can’t opt out of claiming the deduction in the year you make the contribution or any other year that you have excess deductions carried forward to, with the hope that you’ll save more money on your taxes the following year. If you could claim the deduction, even if you don’t opt to itemize, you lose it.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."