Make the Most of Your Giving
(Ensuring your donation is deductible, and choosing the right organization)
Connor Smart, Tax Staff
Since 1917, the IRS has allowed individuals to take a tax deduction for giving to charitable organizations. However, many taxpayers may not be aware of the many stipulations, requirements, and limitations that various tax laws impose on their charitable contributions. For an individual looking to maximize both the impact of their donation and their charitable deduction, some planning and foresight is necessary.
For starters, it is important to recognize that charitable contributions (i.e., donations) are only deductible on a tax return if the filer itemizes their deductions and files Schedule A. If taxpayers choose to use the standard deduction, they will not receive any tax benefit from their charitable gifts. While using the standard deduction should not necessarily dissuade taxpayers from giving to charity (a person can always donate simply because they believe in a cause), it will prevent them from realizing any sort of tax relief for their gifts.
Next, one must consider who they are giving their donation to. If a donor wants to take a deduction for their gift, they must make a contribution to a Qualified Organization. Almost all charitable groups, other than churches and governments within the United States, must apply to the IRS to become a qualified organization. The IRS keeps an active and up-to-date list of every qualifying organization, arranged by state. This record is public and available for free on the IRS website. While there are thousands of charitable groups that perform every manner of service, it is important for donors to ensure that their gifts will be made to one recognized by the IRS as a qualified charitable organization if they hope to get a tax deduction for their contributions. Contributions to entities that (a) are not recognized by the IRS or (b) are to specific individuals – despite their need or charitable actions – will not be tax deductible.
However, even if a taxpayer finds a suitable charitable organization that qualifies for a tax deduction, there may be limitations imposed on the deduction depending on the tax-exempt status of the entity. The amount of deduction allowed for charitable giving is limited to a percentage of the taxpayer’s adjusted gross income (AGI). The IRS imposes the following codes, classifications, and deduction-limitations on gifts to charitable entities grouped by status:
|CODE||CLASSIFICATION||DEDUCTION ALLOWED (percent of AGI)|
|POF||Private Operating Foundation||60%|
|SO, SONFI, or SOUNK||Supporting Organization||60%|
Note that the 60% deduction limit referenced in this article is temporary, impacting years 2018 through 2025. Before and after that period, the limit is 50%.
Public charities are charitable organizations that have broad public support and/or exist to support another public charity, or are organizations that, by definition, perform a broadly public function (for example, a school or a hospital).
Private Operating Foundations:
Not to be confused with standard private foundations described below, POFs actively conduct their own specific charitable activities, programs, and purposes. Common examples are museums, zoos, and libraries. POFs must contribute at least 85% of their annual adjusted net incomes to their exempt activities, and they are not subject to excise taxes on failures to distribute income. They must still pay taxes on net investment income.
Every tax-exempt organization that qualifies as a 501(c)(3) is deemed to be a private foundation, unless it meets one of the specific sets of requirements to qualify as a public charity. In addition to more restrictive deductibility caps (30% of AGI compared to 60% for Public Charities), PFs generally have additional limitations on their behavior compared to Public Charities. Private Foundations are restricted on how much and where they can distribute funds, and have more rigorous investment standards. Private Foundations are typically controlled by a small group of individuals, and most income derives from family-sourced contributions and investment revenue. They are not as directly involved in the community as are public charities, and generally serve their missions by donating to other exempt organizations.
Generally, government entities within the United States are not themselves subject to income tax. Donations made to states, U.S. possessions or subdivisions, and the Federal Government, if made exclusively for public purposes, are tax deductible. Note that gifts made to political groups or candidates running for public office do not qualify for a charitable deduction.
These are charities that carry out their exempt purposes by supporting and assisting a public charity. This classification helps charitable entities align themselves with public charities – thus qualifying for the higher 60% limitation – and avoid private foundation status. Supporting organizations can be further sub-divided, but the nuances of each sub-classification are beyond the scope of this article.
In the same IRS database that lists all qualified organizations, the deductibility code of any registered qualifying charity is provided.
An aspiring philanthropist should also put some thought into what he or she wants to donate, both in amount and type. Generally speaking, cash gifts are often the easiest for the taxpayer. The amount of deduction allowed is the cash given, less the value of anything received in return. However, taxpayers must be diligent with their records – the IRS rules that it is the responsibility of the donor to maintain records that show the name of the qualified organization, the date the gift was given, and the amount given. Credit card statements, receipts from the organization, canceled checks, and payroll deduction statements all qualify. If a donor gives $250 or more in a single gift, the taxpayer must also be able to provide proof of their donation with a proper letter of acknowledgement from the charitable organization.
Gifts of property are a bit more complicated. Depending on the value of the property given, the taxpayer may need to provide substantial additional information, including a description of the property given, the date the gift was made, the name and address of the organization receiving the gift, how the donor acquired the property, a receipt from the organization for gift, and proof of appraisal to determine the value of the property gifted, or proof of purchase to determine the original cost for the property. In general, donations of publicly traded securities are subject to less cumbersome requirements than donations of other types of property.
Taxpayers donating capital gain property may also face additional limitations on their deduction. If a taxpayer donates capital gain property to one of the 60% entities listed above, the taxpayer’s deduction is limited to 30% of AGI. The amount allowed as a deduction for capital gain donations is limited further to 20% of AGI if the donation is to a 30% entity as listed above. Donation of long-term, appreciated securities is a tax-efficient method of donating, because in addition to receiving a contribution deduction, the inherent gain is not taxable.
Time and services volunteered to an organization are never deductible, nor, in general, is a donation of the use of property (for example, a week in a vacation home).
The recently-passed Tax Cuts and Jobs Act significantly alters the charitable contribution landscape. Many types of itemized deductions are either eliminated or restricted beginning in 2018. This, combined with a nearly doubled standard deduction, means far fewer people will itemize. Some will itemize year after year because their donations will allow them to easily exceed the alternative standard deduction. For them, the contribution deduction may now be more potent than ever, because it can offset as much as 60% of income, and itemized deductions are no longer subject to an overall phase-out based on income. For others, the standard deduction will nearly always be higher, and the benefits of donating will not include tax savings. But a third category exists for those whose itemized deductions are close to, but generally not in excess of, the standard deduction. For them, tax savings may be increased by “bunching” donations into every other year. By essentially donating two years’ worth of donations in one year and donating little or nothing the next, the standard deduction will be used in the “off” year, but the higher itemized deductions will be used in the other year. Each rolling two year period will yield more tax savings than would be the case if contributions were spread more evenly over the two years.
Lastly, a taxpayer making a donation should consider the quality of the work performed by the entity, to ensure that the gift is doing the greatest amount of good. Resources such as Guidestar and Charity Navigator keep records on non-profit entities and track how well they employ their resources towards achieving their missions, and publications such as The Week and Time Magazine frequently feature “Charities of the Week,” showcasing organizations that have done exceptionally well at helping further a cause and ensured that donations are used to their maximum benefit.
If you have any questions regarding optimizing your charitable contributions, please contact Connor Smart or Drew Cheney at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.