By The Editors
This column marks the fourth installment in Capital at Play’s financial series, in which area financial experts offer informed opinions to our readership. As November is Nonprofit Awareness Month, we decided to take a look at what the average person should know when considering donating to a nonprofit or charity, and how this relates to deducting those donations from their taxes.
Johnson Price Sprinkle PA
Amy Bibby & Will Smith
Office Managing Partner & Manager Tax Services
Dixon Hughes Goodman LLP
Daniel Johnson III
CPA & Financial Advisor Associate
Webb Investment Services, Inc.
Capital at Play: In donating to nonprofits, what annual dates do I need to be aware of?
MATTHEW: For tax purposes, 12/31 is the date that should be on your mind. You may receive the tax benefits for the year you donate to the organization. One strategy that may be used is creating what we call “charitable capital.” For this strategy, the donor gives the donation to a “donor-advised fund” as a completed gift. The donor receives the tax benefit in the year the donation is made, but can still recommend where the funds should go after the fiscal year is over. This allows donors to take an immediate tax benefit, and in future years, recommend grants from the funds to be given to qualified organizations.
DANIEL: Individuals keep track of gifting on a calendar year basis. If a gift is intended for a particular tax year, it is important that the organization has “constructive receipt” of the property on or prior to December 31. If you are considering the gift of appreciated stock or other property, it is important to begin the process well in advance of year-end.
What are the minimum and maximum amounts I can donate annually to reap as great a tax advantage as possible?
AMY & WILL: The amount you may deduct on your individual tax return is always based on your gross income, so the amount differs from person to person. Tax laws limit your tax deductions to 50% of your Adjusted Gross Income, and the remaining amount of charitable contributions may carry forward for up to five years. Gifts to charity are listed on Form 1040, Schedule A, Lines 16 through 19.
DANIEL: The minimum is an amount that, when combined with your qualified itemized deductions, exceeds the standard deduction for your situation. One exception to this rule is the utilization of a Qualified Charitable Contribution from an IRA. IRA owners who are older than 70½ are able to gift up to $100,000 directly to a nonprofit. Donors receive a dollar-for-dollar reduction in income, but no charitable deduction on their tax return. The maximum donation depends on a number of criteria. First, it depends on how much taxable income you have, whether or not your itemized deductions are being limited by a tax rule named the Pease Limitation, and what kind of property is being donated. When seeking to maximize your gifting, it is a good idea to consult with your CPA or financial advisor.
KATHY: Several factors impact the ultimate tax benefit from making a deductible contribution, based on the status of the donee organization and your own tax situation. At a minimum, you must be able to itemize deductions. The maximum is generally limited to 50% of your adjusted gross income, but lower limits can apply in certain circumstances. Caution: Up to 80% of itemized deductions can be phased when your income is above certain levels. Some options are available that bypass income limitations. For instance, a distribution from your IRA directly to a charity is not included in your income so no charitable deduction is needed. As a bonus, the charity distribution can be used to satisfy your required minimum distribution.
The charitable purpose of the nonprofit does not affect the deduction of donations from taxes. What is most important, however, is whether the organization is a quality charity within section 501(c), and also the tax exempt status of the entity.
Is there any difference between donating to a nonprofit engaged in social work (say, a charitable/giving organization) and to one that’s not a charity (such as an arts organization)?
AMY & WILL: The charitable purpose of the nonprofit does not affect the deduction of donations from taxes. What is most important, however, is whether the organization is a quality charity within section 501(c), and also the tax exempt status of the entity. The IRS provides an online search tool to check this information by visiting the Exempt Organizations Select Check page at www.irs.gov. You can use this tool to search for exempt organizations to check information about federal tax status as well as filings. In addition, it’s important to note that there are differences between public charities and private foundations that can limit a deduction based on the Adjusted Gross Income limits.
MATTHEW: There could be a potential difference in the way your donation is treated for your personal tax purposes. Most charities and many private organizations are considered 501(c)(3) organizations and qualify for tax-exempt status. Donating to these organizations can potentially lighten your tax burden if you itemize your deductions.
Then are there nonprofits for which donations are not eligible as deductions?
AMY & WILL: Yes. Donations made to organizations such as some country clubs and membership associations, among others, are not eligible as deductions. The best way to check if the organization is eligible for such deductions is to visit the Exempt Organizations Select Check page (mentioned above).
DANIEL: Just because a nonprofit organization has 501(c) associated with them, does not mean that they qualify for tax-deductions. A 501(c)(3) organization has been approved by the IRS to be tax-exempt, and most charitable organizations have this designation. Other 501(c) organizations include homeowners’ associations, civic organizations, recreation clubs, business leagues, and many more.
KATHY: Yes. Civic leagues, social organizations, and chambers of commerce are the most common nonprofit organizations for which donations do not qualify as deductible contributions. Also, dues and fees payable to country clubs and homeowners’ associations are not deductible. Refer to Publication 526 at Irs.gov for a comprehensive list of types of organizations ineligible to receive charitable contributions.
MATTHEW: You need to make sure that the nonprofit organization you are donating to is a qualified 501(c) organization in order to claim any deductions. Also, you must get a receipt in case the IRS decides to audit your taxes. Documentation and receipts are crucial for being able to prove that your donation was legitimate.
If spouses make their own separate donations to the same entity but they file taxes jointly, can both donations be deducted?
MATTHEW: The short answer: yes. However, the couple must itemize their deductions in lieu of taking the standard deduction, which, for 2016 will be $12,600. It’s important to know that even though a donation to a charity might qualify you for tax saving benefits, your itemized deductions need to exceed the standard deduction amount for any realized benefit.
DANIEL: Yes, individuals are able to make their own donations to non-profits throughout the year. Then, when taxes are filed, these donations are aggregated for deduction purposes. For this reason, it is important that spouses coordinate gifting to ensure that they are maximizing their tax benefits.
Are there any donation incentives scheduled to expire in the near future?
MATTHEW: Not that we are aware of, but the IRS recently made the Qualified Charitable Distribution (QCD) permanent in 2015. The QCD allows for those over the age of 70½ to donate up to $100,000 from their IRA to a qualified nonprofit organization. This donation can satisfy the required minimum distribution (RMD) and is not included in calculating adjust gross income (AGI). Because of this, however, you cannot deduct the amount of the donation on your taxes.
I like to pledge to my local NPR affiliate during both its spring and fall fund drives. Is there any difference, tax-wise, in making multiple donations versus a one-time lump sum?
MATTHEW: Not really. Just be aware that the tax benefits can only be used in the year the donations were made.
KATHY: Possibly. In order to claim a charitable deduction, the donor must not receive any tangible benefit for their donation [such as a premium; the dollar value of a CD,T-shirt, concert ticket, etc., must be subtracted from the amount of the claim before taking the deduction], and must retain support in the form of a bank record or a written receipt from the charity. For gifts of $250 or more, a written acknowledgment from the charity with certain required information is also needed. Each disbursement is considered a single donation for this expanded substantiation requirement, so while only cancelled checks would suffice to support two donations of $200, one $400 check would require the charity’s written acknowledgment that no goods or services were received by donor.
Relatedly, in the past I have signed up for several Kickstarter and GoFundMe campaigns. Some describe this as “pledging,” while others call them “pre-orders.” Do donations to such campaigns qualify as deduction-eligible?
KATHY: Contributions to crowdfunding platforms are rarely deductible, as the most common structure provides a direct benefit to an individual or something of substance to the donor. However, some nonprofits are beginning to use this arena for fundraising. If you think you are making a charitable contribution, be sure to obtain evidence of the organization’s nonprofit status, assurance related to the use of funds, and appropriate substantiation.
DANIEL: It is possible that you are able to deduct contributions to Kickstarter or GoFundMe campaigns by a 501(c)(3) organization. However, if there is any benefit received by the donor, the deduction must be reduced by the fair market value of the product or service received by the donor. This is also true for charitable events or dinners.
AMY & WILL: Donations may qualify if they are given to qualified 501(c)(3) organizations, which you can check using the IRS’s Exempt Organization Select Check. However, if you donate to a qualified 501(c)(3) organization and you are receiving an item or other benefit, this does affect your charitable deduction amount. For example, you may receive complimentary tickets to an organization’s charitable event in return for your charitable donation to the organization. A 501(c)(3) organization is responsible for issuing a gift receipt that discloses the value of the charitable amount received that is actually deductible for tax purposes. Be sure you receive a gift receipt from any such organization, since the IRS requires these for proper documentation on your individual tax return.
I’m frequently approached by friends and family members to get involved with their pet causes—typically, by donating. I can’t always afford to do so; plus, not all of them seem worthwhile. Is there a reliable way to determine if an organization is both tax-exempt and a responsible handler of its finances? Also, if I decide not to donate, how do I tell them without sounding like a Scrooge?
AMY & WILL: The best way to check the tax-exempt status of an organization is to use the IRS’s Exempt Organization Select Check (www.irs.gov). You can also consult GuideStar (www.guidestar.org) or Charity Navigator (www.charitynavigator.org), which allow you to view ratings of organizations based on their financial responsibility, as well as the prior three years of their annual Form 990. In regards to explaining an unwillingness to donate to a charity or cause, one of the most important steps you and your family can make is to develop your own charitable giving plan that takes into account your philanthropic philosophy and what causes attract your passion and attention. When approached for contribution, having this plan and philosophy can be a part of a great dialogue about you and your family’s charitable passions and strategy for giving. You may start by saying something like, “My family and I have strategically committed to give funds that help better education. Can you tell me if you feel that this organization aligns with my family’s overall strategic goals?”
The above responses are the opinions of our columnists and are not intended to take the place of financial or legal advice. You should discuss any financial, legal, or tax matters with the appropriate professional, and determine if your advisor provides tax services before requesting tax advice.
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