Fall is here–the end of the year isn’t far away. If your family is like my family, our attention turns to many different things: getting winter clothes ready, watching football, making holiday plans. We also look back to see how the year has taken shape and what we still want to accomplish. Being mindful about what’s happened so far and what we still want to do during the year is important to us. It focuses our activities, gives us a good sense of our finances and lets us make informed choices.
One key element of this exercise is whether we have or want to make a commitment to a charity (and when I say charity that includes religious, social and educational organizations). The commitment may be money or time or both. It could be spread over the months or be a one time contribution (or anything in between).
What drives your decision to give time or money to a charity?
- The charity’s cause is your cause
- You follow the religious beliefs of the organization
- You attended the school and want to help future generations of students
- You appreciate and use the potential tax benefits of giving to a charity
For most people, one of the first three bullets is what drives the decision to make the charitable gift. The tax benefits that come along are an added benefit. For some people though, the potential income tax benefit is the initial motivation and ultimately deciding on the charity is based on these other factors.
The Tax Rules: There Are Many
How about a quick test? Which of the following is not a deductible charitable gift?
- Appreciated assets
- Life insurance
- Your time
If you picked number four, you’re right.
The tax rules spell out what type of gifts are deductible, what types of organizations you can give to and take a charitable deduction, what you have to do to substantiate the gift. Some of these rules are quite simple. Some of the rules are complex–particularly those involving charitable trusts.
Let’s start at the beginning: Here’s an excerpt from the IRS publication that helps demonstrate the type of organizations that you may contribute to on a tax deductible basis.
Deductible As Charitable Contributions
Money or property you give to:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt or maintain a public park)
- Nonprofit schools and hospitals
- The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.
- War veterans’ groups
- Out-of-pocket expenses when you serve a qualified organization as a volunteer
Not Deductible As Charitable Contributions
Money or property you give to:
- Civic leagues, social and sports clubs, labor unions and chambers of commerce
- Groups that are run for personal profit
- Groups whose purpose is to lobby for law changes
- Homeowners’ associations
- Political groups or candidates for public office
- Value of your time or series
- Value of blood given to a blood bank.
From IRS Publication 526–Charitable Contributions
How do you know if the specific organization you are giving to meets the requirements to be treated as a charity or nonprofit for these purposes? You can check out the organizations on the IRS website:
Next – how much of your contribution can you deduct?
- Cash contributions: Generally you may take an income tax deduction up to 50% of your adjusted gross income. You may carry the deduction forward for 5 years.
- Long term appreciated assets (such as stocks, real estate, etc. held for more than 1 year) you may take as a deduction the full fair market value up to 30% of your adjusted gross income. You may carry the deduction forward for 5 years.
- Ordinary income property (any property that would generate ordinary income if you sold the property rather than gifted the property to the charity – such as stock held less than one year) you may take a deduction of up to 50% your adjusted gross income. However, the amount you may deduct is limited to your cost basis and not the fair market value of the asset.
Finally, are there rules about what paperwork you need to file with your tax return?
Yes. An IRS brochure details the myriad requirements. You can get the brochure here.
Now that it’s fall–take some time to reflect on your commitments to those charities that are important to you.