Charitable Donations Are Not Always Tax Deductions

Yes, the calendar pages continue to fall off and end of the year is fast approaching. Soon, the Thanksgiving and Christmas (Hanukkah too) holidays will be upon us. With that come the letters and phone calls and events looking for your charitable donations. And, in many instances, you can claim those donations you make on your tax return (that is, of course, if you itemize, but more on that later). Even if you can’t get the tax break, it is still a nice thing to do for others who may be less fortunate. But, things are not always as they appear.

 

The first thing you should be aware of is not everyone that comes knocking at your door represents a viable charity. Unless the organization is an IRS section 501(c)(3) exempt organization, the donation is not legally deductible. It may not make sense to some people as to why there is a distinction here, but the answer is quite simple: qualified charitable organizations do not pay taxes, and therefore are held to strict IRS guidelines relating to their reporting of information and how the monies they collect are used. By giving the organization a tax-break, you are also benefiting by being able to take a deduction as well. So, just because a little kid wearing a baseball uniform knocks on the door, or someone sets up a table in the mall handing out religious blessings in exchange for cash, they are not always legitimate charitable organizations. The IRS has a database you can search to check up on any organization you may be thinking about donating to.

 

Another big issue arises when it comes to charity events. You have undoubtedly heard about dinners where a portion of the per-plate cost goes to a charity, or a special event at a hot-spot or cultural location where a charity will be helped, or even a raffle/auction to help raise funds. Well, I’m sorry to inform you that many of these instances are not considered donations (or at least not entirely). See, the way it goes is, you have to give up something of value in order for it to be considered a qualified donation. When you get something of value, it’s essentially a purchase transaction, so you lose any or all of the possibly deduction. Here are examples of the three most common scenarios:

 

  • You go to a charity dinner event which costs $500 per plate. Since you are actually receiving a meal in exchange for that donation, you can only deduct the portion of your donation that exceeds the cost of the meal.

  • You go to an event with an auction in which all proceeds go to charity. You bid on, and win a cruise for 2. The cruise has a retail value of $1,500 but the bid you won with was only $1,000. You cannot deduct any of that money since you received something that had a higher value than your contribution. 

  • You open the mail and see a letter from your favorite charity and send them a check. A few weeks later you receive a thank you letter in the mail. The entire contribution is deductible because you did not receive anything of value (monetary value at least) in return for your gift.

 

Most organizations will include these caveats in their marketing materials, or in the receipt you receive. The problem is that many people do not read the fine print on anything, so when they get to their tax preparer they are shocked when told about the disqualified portions.

 

Yet another problem when it comes to deducting charitable donations is the requirement that the taxpayer be able to use itemized deductions when preparing their tax return. It seems like a such a simple thing, but the recipient organizations probably think it will scare people out of donating if they advertise something like, “Your gift is tax deductible but only if you itemize!” And, of course they also don’t tell you that you will never be able to deduct the full value of anything you give (in terms of giving goods), but that’s how it works. The most you will be able to deduct on your tax return is 50% of your adjusted gross income depending on the type of donation you make.

 

Ultimately, the responsibility falls on you, the taxpayer, to make sure that you know what you are doing before making any kind of donation. Call the organization, call your tax preparer, call the IRS taxpayer advocate if you have to, just make sure that you have all the information necessary to make the right choice. It’s not such a bad idea to seek help on something you’re not 100% sure about.

 

  • http://www.wealthinformatics.com/ Suba

    Agreed on all counts. 

    I am curious about one thing though. My ex-employer used to deduct charitable donations from the pay check. And I am told that they do this before deducting taxes. At the end of the year if the total doesn’t add up to enough amount to itemize, will it be added again in the W2? This might be an odd question, I have been meaning to call some old colleagues and ask them their experience. This just reminded me of the question. Do you know how it is usually handled?

    • http://www.dollarversity.com Eric J. Nisall

      Well Suba, any pre-tax deductions are generally not listed on a W-2. Items such as pre-tax donations, retirement deferrals, insurance, etc. are normally listed in a separate section of the W-2 package.

      What happens is that since the donations were taken pre-tax, you never paid tax on them to begin with, and therefore you can’t claim them on your 1040, regardless of whether or not you itemize. Normally, if you have donations (post-tax), but cannot use them, you can carry them forward for up to 5 years.

  • http://www.carefulcents.com/ Carrie Smith

    This is a great article, and very timely as the holidays are fast approaching (like you mentioned). I’m glad you broke down charitable giving and events cause I had to recently learn this too. Just because you spent money on a dinner or trip doesn’t mean you can deduct it.

    Also, if anyone is going to give money or donate to individuals who are in “need” it doesn’t mean you can take that as a deduction. You’re basically just giving them money to help them out, they aren’t a qualified charity.

    • http://www.dollarversity.com Eric J. Nisall

      Thanks Carrie. I know there are a lot of things that confuse people, but this is one of those areas where it just takes a little explaining to set the record straight.

      You are 100% correct on the individual donations. In fact, the IRS stipulates that an individuals are not considered charitable recipients in regards to tax deductions, just like social groups, sports groups and a host of others.

  • http://dailymoneyshot.net Jana @ Daily Money Shot

    This is really interesting. I didn’t know most of this. 

    Also, nice props to Hanukkah! It usually gets lost in the shuffle.

    • http://www.dollarversity.com Eric J. Nisall

      Thanks Jana, some people forget about the Jewish holidays because they aren’t cause for the county to shut down like Christmas and Easter ;-) Glad I could share some knowledge too!

  • http://youngadultfinances.com/ FinancialSuccessforYoungAdults

    I actually didn’t know most of this either. I make most of my charitable contributions to my church and through end of year donations to Goodwill.

    • http://www.dollarversity.com Eric J. Nisall

      You’re safe then, LaTisha! And good luck with the new site, I think it may get more search traffic just because of the name.

  • http://SweatingTheBigStuff.com Daniel

    I was surprised a few years ago (my first year out of college) that my charitable contributions weren’t tax deductible. I had no idea I had to itemize. So does it make sense to wait until you have a house or something to contribute to charity?

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      To be honest, I would never advise anyone to make financial decisions based solely on the tax consequences alone. If it is in your nature to give to charity, then I would say to continue giving regardless of whether you can deduct the donation or not. It’s pretty much a personal decision that only you can make.