Understanding the Basics of Charitable Giving
There’s a reason why nonprofits devote so much time and energy to end-of-year fundraising campaigns. According to Network for Good, 30 percent of all charitable giving happens during the month of December. In fact, 12 percent of all giving happens in the final three days of the year.
While many people are in a giving mood during the holiday season, it’s no secret that donations to nonprofits often bring tax benefits. It can be a win-win situation for nonprofits and donors – as long as you understand and play by the rules. Here are some of the basics.
Type of Organization
The organization receiving your donation must be registered as a 501(c)(3) organization and based in the U.S. The IRS has a simple tool that allows you to find out if an organization is eligible to receive tax-deductible donations.
Deadlines for End-of-Year Charitable Giving
December 31 is typically the last day to make charitable contributions. Checks must be mailed by December 31. Credit cards must be charged by December 31 even if you don’t pay your bill until January. For stock donations, the stock certificate must be mailed by December 31. If stock is transferred through an agent, the transfer must be recorded on the company’s books by December 31.
Stock and non-cash property are considered donations at their fair value. For example, if you buy stock for $100 and its value is $200 when donated, you can claim a $200 charitable deduction.
Stock value is easy to look up because it’s traded on a public exchange. For other items, identifying value can be more complicated. Organizations such as Goodwill and the Salvation Army have created lists that assign dollar values for various items. Clothing, toys, books, furniture and other household items must be in good condition to be considered for a deduction.
Keep in mind that the burden of proof of a donation is on the taxpayer, not the nonprofit, so retain all emails and physical documents related to your donations. A receipt from a nonprofit will include the date and a generic description (three boxes of clothes, for example), but it’s up to you to create a list of what was donated and the value for each item.
If non-cash donations total more than $500, you need to file Form 8283 for Noncash Charitable Contributions. If they total more than $5,000, you need an appraisal of your donation. A deduction for a donated car, boat, etc. is limited to the final sale price when the charity sells it.
If you receive any benefit in exchange for your donation, you must subtract the value of the goods or services received. For example, if you pay $500 to attend a nonprofit’s annual gala but the cost of the dinner is $100, you can only take a deduction for $400.
Relevant Provisions in the New Tax Legislation
There are a number of provisions that could impact charitable giving, but here are three key provisions to keep in mind.
- The standard deduction almost doubled from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. Many in the nonprofit community are concerned that giving will suffer because more taxpayers will take the standard deduction instead of itemizing deductible expenses, including charitable giving. Although we hope people will continue to support worthy causes, this is a personal decision for each individual to make. From a tax perspective, we recommend that you continue to track charitable giving as you have in years past before deciding if you should take the standard deduction or itemize.
- The charitable contribution deduction limit for an individual has been increased from 50 percent to 60 percent of his or her adjusted gross income. This may serve as incentive for philanthropists to give more to charity because they can deduct more of their donations.
- The Pease limitation has been repealed. Named for former Senator Donald Pease, this limitation reduced the benefits of charitable giving and other itemized deductions when an individual’s adjusted gross income reached $261,500 ($313,800 for married couples filing jointly). High-income folks might consider donating more to nonprofits to take advantage of the full benefits.
Understanding the complexities of deductible donations and the new tax law underscores the need for year-round tax planning. Contact us to help you develop a strategy that maximizes tax benefits without compromising your support for nonprofits that do such great work.