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.