One of the most confusing aspects of the American income tax system is what qualifies as a tax deduction. Of these deductions, by far the ones that are most obscure are deductions for gifts to charitable organizations.
What is a charitable organization?
Taxpayers are allowed to deduct contributions only if they make them to qualified charitable organizations. Other than churches, federal or state governments, Indian tribal governments, or certain federal or state government sponsored organizations, for an organization to become a qualified charitable organization it must apply to the Internal Revenue Service (IRS).
Generally there are only five types of organizations that can be qualified charitable organizations.
- A community chest, corporation, trust, fund, or foundation organized under federal or state government regulations. These include charitable organizations (like the Red Cross, CARE, and the United Way); religious institutions (churches, mosques, synagogues, temples, conventions, and religious associations); scientific organizations (research foundations, UNESCO, fellowships, nonprofit hospitals, civil defense, and medical research); literary organizations (libraries, some historical museums, and historical preservation societies); educational (Boy Scouts, Girl Scouts, college scholarship programs, some gifts to universities and university alumni funds, public parks, national parks, and some types of museums, like art and natural history); and prevention of cruelty to children and animals.
- War veterans' organizations. These include Veterans of Foreign Wars, Daughters of the Republic, and American Legion.
- Domestic fraternal societies. These are charitable organizations that operate under the lodge system. These include The Shrine division of Masonry, Lion's Club, and Rotary Club.
- Certain nonprofit cemetery companies. Contributions are deductible only if the gift is given for general care, not for care of a specific burial lot or mausoleum.
- The United States, any state, the District of Columbia, any U.S. possession, or American Indian tribal government that performs substantial government services on behalf of the tribe.
- Certain foreign charitable organizations. Deductions can be claimed for gifts to certain charitable organizations in Canada, Israel, and Mexico.
Contributions that can be deducted
Generally, taxpayers can deduct contributions of money or property made to a charitable organization. If property is given to a qualified organization, taxpayers can generally deduct the fair market value of the property at the time of the contribution. However, charitable contributions cannot total more than 50 percent of taxpayers' adjusted gross income.
If taxpayers receive benefits as a result of contributions, they can deduct only the amount that is over the value of the benefit. As an example, if a taxpayer gives an offering to a ministry for $25 and receives in return a book that is worth $10, he or she can deduct $15 as a charitable contribution.
Many times membership fees or dues can be deducted if they are paid to a qualified charitable organization; only the amount that is over the value of any benefits received from the organization can be deducted.
Contributions that cannot be deducted
Taxpayers cannot receive tax deductions for non-qualifying contributions. Non-qualifying contributions include the following.
- Contributions made to fraternal societies for the burial of deceased members
- Contributions made to individuals who are needy or worthy
- Payments made to individual members of the clergy for personal expenses
- Expenses paid by taxpayers on behalf of or for the benefit of another person
- Payments made to a hospital on behalf of a specific patient
- Payments or dues to social clubs (like country clubs), chambers of commerce, civic leagues, athletic leagues, home owners associations, labor unions, political parties and candidates, communist organizations, lobbyists, or foreign charities (other than some charitable organizations in Canada, Mexico, and Israel).
- School tuition
- Value of donated time and/or services, including donated blood or blood plasma
- Costs of raffles, bingo, or lottery, even though such games may be sponsored by a qualified charitable organization
- Adoption fees (although the adoption tax credit is available)
- Appraisal fees
In order for taxpayers to be able to deduct charitable contributions, accurate records must be kept to verify or confirm claimed contributions. For the most accurate and up-to-date information regarding deductible contributions to qualified charitable organizations, we suggest you consult with an attorney, tax advisor, or representative of the IRS. For additional information, obtain IRS Publications 17, 526, and 561 and IRS Forms 1040-Scheducle A and 8283.