Tax Deduction Limits on Charitable Donations

Churches receive special tax treatment under the Internal Revenue Code.

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The Internal Revenue Service allows you to deduct the value of many contributions to certain nonprofit charitable organizations from your taxable income, but it imposes limits on the organizations that you can donate to, the contributions you are able to deduct, and the amount of your deduction. Failure to observe these limitations could result in retroactive taxation and even tax penalties.

Qualified Organizations

Just because an organization is tax-exempt doesn't mean you can deduct your donations to it. Only donations to organizations qualified under Section 501(c)(3) of the Internal Revenue Code are tax-deductible. Qualified organizations are nonprofit and operate for certain purposes. Examples of typical 501(c)(3) organizations include charities, hospitals, universities, scientific research institutes and churches. With the exception of churches, each of these organizations must have filed Form 1023 and received an affirmative determination letter from the IRS before contributions to it can be deducted. Although churches don''t need a determination letter, without one there is a chance that the IRS might retroactively revoke a church's 501(c)(3) and revoke your deduction for contributions to it.

Unnrecognized Donations

Donations of cash and goods are usually deductible, but you can't treat time spent working with an organization as a donation and deduct it from your taxable income. Likewise, you can't deduct the value of your services. If you receive something of value in return for anything you donate, you can't deduct the value of the donation, even if the value of what you received in return was worth much less than the value of what you donated.

Valuation of Goods

Generally, you may deduct the fair market value of donated goods. If the goods have increased in value since you bought them, the same rule usually applies. Under certain circumstances, you may have to reduce the value of your deduction to your original cost of purchasing the goods you donated. Certain types of property -- such as clothing, household items and automobiles -- are subject to special valuation rules that may lower the value of your deduction below that of the goods' fair market value. If you overstate the value of donated property, the IRS can impose a penalty of 20 percent or 40 percent of the amount you owe, depending on the magnitude of the overstatement.

Adjusted Gross Income

Your maximum deduction depends on the type of organization you donate to. For contributions to most organizations, the limit is 50 percent of your adjusted gross income. A 30-percent ceiling applies to gifts that the organization will use rather than donate to others -- a bus used by a nonprofit high school, for example. The 30-percent limit also applies to any gifts to nonprofits that donate primarily to other nonprofits rather than to the general public. Gifts that would otherwise be subject to the 30-percent limit are subject to a 20-percent limit if they are capital gain property, such as corporate shares.