Charity Tax Code: Rules for Deductions
Understand the tax code's framework for charitable donations. This guide clarifies the rules for making your contributions count as a valid tax deduction.
The United States charity tax code provides a framework for tax-exempt organizations and the individuals who donate to them. These regulations define which organizations can receive tax-deductible gifts and outline the rules for donors to claim deductions on their income tax returns. The tax benefits associated with giving are intended to encourage philanthropic support for various causes.
What Constitutes a Qualified Charity
For a donation to be tax-deductible, it must be made to a “qualified charitable organization” as defined by the Internal Revenue Service (IRS). The most common type is a 501(c)(3) organization, a designation referring to the relevant section of the Internal Revenue Code. These organizations are formed for religious, charitable, scientific, literary, or educational purposes and include churches, nonprofit hospitals, and schools.
It is important to distinguish these groups from other tax-exempt entities, such as 501(c)(4) organizations, which include civic leagues and social welfare groups. While 501(c)(4) organizations are exempt from paying taxes, contributions made to them are not deductible. Gifts made directly to individuals, political organizations, or foreign charities are also not eligible for a U.S. tax deduction.
Before donating, a donor should verify the organization’s status using the IRS’s online Tax Exempt Organization Search tool. This database allows users to confirm a group’s 501(c)(3) status. An absence from this list could mean the organization has lost its tax-exempt status. However, some organizations, such as churches, are automatically considered qualified and may not appear in the database.
Rules for Deductible Contributions
Cash and Property Donations
Cash contributions can be made by check, credit card, or electronic funds transfer. Donations of property are also deductible, and the deduction is based on the property’s fair market value (FMV) at the time of the gift. FMV is the price at which property would change hands between a willing buyer and a willing seller.
Common examples of non-cash donations include clothing, household items, vehicles, and securities like stocks and bonds. For items such as clothing and household goods to be deductible, they must be in at least “good used condition or better.”
Non-Deductible Contributions
Several types of contributions are not deductible. The value of a person’s time, services, or donated blood cannot be deducted. For example, if a graphic designer creates a logo for a charity free of charge, they cannot deduct the value of their labor.
If a donor receives a benefit in exchange for their contribution, the deductible amount is limited to the excess of the contribution over the value of the benefit received. For instance, if a person pays $100 for a ticket to a charity dinner and the fair market value of the meal is $40, only $60 is deductible. This rule applies to merchandise, event admissions, and other goods or services provided by the charity.
Calculating and Claiming the Deduction
To claim a charitable deduction, taxpayers must itemize deductions on Schedule A of Form 1040. This requires forgoing the standard deduction. A taxpayer should only itemize if their total itemized deductions, including charitable gifts, are greater than the standard deduction amount for that tax year.
The amount of charitable contributions a taxpayer can deduct is subject to limits based on their adjusted gross income (AGI). For cash contributions to most public charities, the deduction is limited to 60% of the taxpayer’s AGI through the end of 2025. This limit is scheduled to revert to 50% of AGI starting in 2026.
For donations of non-cash assets, such as stocks or real estate held for more than one year, the deduction is limited to 30% of AGI. If a taxpayer’s donations exceed these AGI limits in a given year, the excess amount is not lost. The IRS allows excess contributions to be carried over and deducted for up to five subsequent tax years.
Required Documentation and Reporting
The specific records a taxpayer must keep depend on the amount and type of the donation. Failure to maintain the required proof can result in the disallowance of the deduction if the tax return is audited. The documentation requirements are tiered based on the donation’s value.
- For any single donation under $250, you must keep a reliable record like a canceled check, bank statement, or a receipt from the charity. A pay stub or Form W-2 is sufficient for payroll deductions.
- For a single contribution of $250 or more, you must obtain a “contemporaneous written acknowledgment” from the organization before filing your tax return. This document must state the donation amount, describe any property given, and declare whether goods or services were provided in exchange, including a good-faith estimate of their value.
- For non-cash donations valued over $500, you must file Form 8283, Noncash Charitable Contributions, with your tax return.
- For a non-cash donation of an item or group of similar items valued at more than $5,000, you must also obtain a qualified appraisal. Both the appraiser and an official from the charity must sign Form 8283.