What Is Pub. 526 and How Does It Apply to Charitable Donations?

The IRS provides guidelines to help taxpayers properly claim deductions for charitable contributions. A key resource is Publication 526, which outlines the rules for deducting donations on federal tax returns. Understanding these regulations ensures donors maximize tax benefits while remaining compliant.

To claim deductions, taxpayers must know which organizations qualify, what types of donations are deductible, and the necessary documentation.

Qualifying Organizations

Not all organizations that solicit donations qualify for tax-deductible contributions. The IRS determines eligibility under Section 170(c) of the Internal Revenue Code. Generally, qualifying organizations include those dedicated to religious, charitable, scientific, literary, or educational purposes, as well as groups preventing cruelty to animals or children. Certain governmental entities also qualify if donations are used for public purposes.

The most common qualifying organization is a 501(c)(3) nonprofit, which must apply for and receive tax-exempt status from the IRS. Religious institutions, such as churches, automatically qualify without needing formal recognition. Some organizations outside 501(c)(3) status, such as certain veterans’ groups and fraternal societies, may also qualify if donations are strictly used for charitable purposes.

Donors can verify an organization’s eligibility using the IRS’s Tax Exempt Organization Search (TEOS) tool. Contributions to non-qualifying organizations, even if they serve a charitable purpose, are not deductible. Since organizations can lose tax-exempt status due to noncompliance, checking their standing before donating is advisable.

Categories of Donations

Charitable contributions fall into different categories, each with rules on valuation, deductibility limits, and reporting requirements. Understanding these distinctions helps taxpayers claim deductions correctly and avoid audit issues.

Monetary

Cash donations are the simplest type of charitable contribution, including payments made by cash, check, electronic funds transfer, credit card, or payroll deduction. Taxpayers can deduct the full amount if the donation is made to a qualifying organization and is not exchanged for goods or services beyond minimal value.

Individuals can generally deduct up to 60% of their adjusted gross income (AGI) for cash contributions to public charities and certain private foundations. If donations exceed this limit, the excess can be carried forward for up to five years.

For payroll deductions, employees must retain a pay stub, W-2 form, or employer-provided documentation showing the amount withheld. If a donor receives something in return, such as event tickets or merchandise, only the portion exceeding the fair market value of the benefit received is deductible.

Property

Donating physical items like clothing, furniture, vehicles, or real estate involves additional considerations. The deduction is generally based on the fair market value (FMV), or the price the item would sell for in an open market.

For household goods and clothing, items must be in “good used condition or better” to be deductible. If an item is valued over $500 but is not in good condition, an appraisal is required.

For vehicle donations, the deduction depends on how the charity uses the car. If the organization sells it, the donor can only deduct the sale price. If the charity uses the vehicle for its operations, the donor may claim the FMV, provided they obtain a written acknowledgment from the organization.

Real estate donations often require a qualified appraisal and additional IRS forms, such as Form 8283 for noncash contributions exceeding $500. If the property has appreciated in value, donating it instead of selling it first can help avoid capital gains tax while still receiving a deduction.

Other Assets

Taxpayers can also donate stocks, bonds, cryptocurrency, and other financial assets, which can provide tax advantages, particularly when donating appreciated securities.

For publicly traded stocks or mutual fund shares, the deduction is typically based on the FMV at the time of the gift. If the securities have been held for more than one year, donors can deduct the full FMV without paying capital gains tax. If held for one year or less, the deduction is limited to the cost basis (original purchase price).

Cryptocurrency donations follow similar rules but require additional documentation. Since the IRS classifies digital assets as property, donors must determine FMV based on the exchange rate at the time of the transaction. If the donation exceeds $5,000, a qualified appraisal is required, as cryptocurrency is not considered a publicly traded security.

Other complex assets, such as privately held business interests or intellectual property, may also be donated but often require legal and tax planning. In some cases, deductions for these contributions are limited to the lesser of FMV or the donor’s cost basis, depending on how the asset would be treated if sold.

Documentation Requirements

Proper recordkeeping is necessary to substantiate charitable contributions. The level of documentation depends on the donation amount and type, with stricter requirements for larger contributions.

For cash gifts under $250, a bank statement, credit card statement, or a receipt from the charity showing the organization’s name, contribution date, and amount is sufficient. When donations exceed $250, a written acknowledgment from the organization is required. This letter must confirm the donation amount and state whether any goods or services were provided in exchange. If something was received, the acknowledgment must specify its estimated value, as only the portion exceeding that amount is deductible.

Noncash contributions require additional documentation depending on their value. If a donated item or group of similar items is valued over $500, Form 8283 must be attached to the tax return. For contributions exceeding $5,000, a qualified appraisal is generally required unless the donation consists of publicly traded securities. The appraisal must be conducted by a qualified appraiser, and the charity must sign a section of Form 8283 to confirm receipt.

Donations exceeding $500,000 require even more stringent reporting. In such cases, the full appraisal must be submitted with the tax return rather than just being retained for records. This rule applies to tangible property, real estate, and certain privately held securities. If the IRS challenges the valuation, penalties may be imposed if the claimed deduction is deemed excessive.

Unique Donation Cases

Certain charitable contributions present complexities that require additional considerations for tax compliance and deduction eligibility.

One such scenario involves donations of intellectual property, such as patents, copyrights, or trademarks. The deduction for these contributions is generally limited to the lesser of the donor’s adjusted basis or the property’s fair market value. However, if the recipient organization generates income from the donated intellectual property, the donor may be able to claim additional deductions based on a percentage of that income over a specified period. This structure incentivizes donations that have ongoing value rather than those given solely for an immediate tax benefit.

Another unique case involves charitable remainder trusts (CRTs), which allow donors to contribute assets while retaining an income stream for a specified period. These trusts provide an immediate partial deduction based on the present value of the remainder interest that will eventually pass to the charity. The deduction depends on factors such as the donor’s life expectancy, the payout rate, and the applicable federal mid-term rate. If structured correctly, a CRT can provide significant tax advantages by deferring capital gains taxes on appreciated assets while generating income for the donor.