Tax Treatment of Charitable Contributions: What You Should Know

Altruism may be its own reward, but it doesn’t have to be its only reward. Your charitable contributions could benefit you in more practical ways - we’re talking about tax deductions. If you have contributed or intend to contribute to a charitable organization this year, read on to find out if you can claim the charitable contribution deduction.

In this post, we will cover the essential guidelines governing the tax treatment of charitable donations for individuals, providing clarity on deductions, eligible organizations, and the documentation required for a seamless and tax-efficient philanthropic journey.

What Is a Charitable Contribution?

A charitable contribution is a gift - which could be in the form of money or property - given to a charitable organization or cause to support a particular mission or help those in need.

People or corporations usually make these contributions to non-profit organizations that operate for the benefit of the public or a specific community. Also, the person or corporation making this donation does not usually receive anything of value in return.

Here’s how IRS Publication 526 defines it:

“A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.”

Therefore, a contribution qualifies as a charitable contribution if it fulfills these conditions:

• It is a donation or gift.
• It is made voluntarily.
• The donation is made to a qualified organization.
• The person/organization making the donation does not receive or expect to receive something of equal value.

What Is the Tax Treatment of Charitable Contributions?

In the United States, taxpayers that make donations can claim deductions on their federal tax returns by deducting the donations from their annual adjusted gross income (AGI). The deductible portion for charitable contributions is typically capped at a maximum of 60% of your AGI.

However, depending on the nature of the property donated and the recipient organization, this deduction may be further restricted to 50%, 30%, or 20% of your AGI. These rules also vary based on whether you’re an individual taxpayer, a business, or a corporate donor.

To claim this deduction, you are required to utilize either Form 1040 or Form 1040-SR and itemize your deductible contributions on Schedule A.

What Are Qualified Organizations?

A qualified charitable organization is a non-profit entity that meets the criteria set by the US Treasury according to Section 501(c)(3) of the Internal Revenue Code (IRC).

Such organizations include non-profit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals

What are the types of qualified organizations?

Generally, the following types of organizations are qualified organizations:

• A community chest, corporation, trust, fund, or foundation formed in the US or its territories (like Puerto Rico) organized and operated only for charitable, religious, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals

• Certain organizations fostering national or international amateur sports competitions

• Organizations for war veterans, like posts, auxiliaries, trusts, or foundations, established in the US or its territories

• Domestic fraternal societies, orders, and associations operating under the lodge system (only deductible if the donation is used for charitable purposes)

• Certain non-profit cemetery companies or corporations.

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  ** Note: Your contribution to this type of organization isn’t deductible if it can be used for the care of a specific lot or mausoleum crypt.**

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• The United States, a state, the District of Columbia, a US territory, a local government division of a state or US territory, or an Indian tribal government and its components

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  ** _Note: Your contribution is tax-deductible only if it is strictly for public purposes. Here’s an example: You give money to your local police department for it to be used as a reward for information about a crime. Since the city police department is a qualified organization and your contribution is for a public cause, you are eligible to claim a deduction for your donation. _**

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What are some examples of qualified organizations?

• Religious organizations like churches, temples, synagogues, mosques, and similar religious groups

• Well-known non-profit organizations such as the American Red Cross and the United Way

• Educational non-profit entities, including organizations like the Scouts, colleges, and museums

• Non-profit daycare centers that offer childcare services to the general public, with the primary goal of enabling parents and guardians to work

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  Note: However, if the donation serves as a substitute for tuition or enrollment fees, it does not qualify for a charitable deduction.

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• Non-profit hospitals and organizations engaged in medical research

• Utility company emergency energy programs, if the utility company is an agent for a charitable organization that assists individuals with emergency energy needs

• Non-profit volunteer fire departments

• Non-profit groups responsible for the development and upkeep of public parks and recreational facilities

• Organizations dedicated to civil defense efforts

An organization can be non-profit without 501(c)(3) status, which can complicate matters a bit. To verify if an organization that you contributed to is a charitable organization for income tax deduction purposes, you can use the IRS’s Tax Exempt Organization Search Tool.

What Types of Charitable Contributions Can I Deduct?

In most cases, you can claim a deduction for cash contributions you make to a qualified organization for its benefit. If you donate property to a qualified organization, you can typically deduct its current fair market value (FMV) at the time of the donation.

Here’s what you cannot deduct as a charitable contribution

• Contribution to a specific individual:** **Donations directly given to individuals in need or deserving, even if they are facilitated through a qualified organization, are not tax-deductible. However, contributions to a qualified organization that assists individuals in need or deserving cases, without specifying a particular recipient, can be deducted. For instance, contributions for disaster relief efforts can be deducted. But if your contributions are specifically designated for a particular individual, they cannot be.

• Contribution to a nonqualified organization: You cannot claim deductions for donations made to organizations that do not have the eligibility to receive tax-deductible contributions. This includes organizations such as specific state bar associations, business-related entities like chambers of commerce and similar organizations, civic groups and associations, and social clubs such as country clubs.

• Contribution with a benefit: When you make a contribution to a qualified organization and receive a benefit in return, you can only deduct the portion of your contribution that exceeds the value of the benefit received.

  You may have seen many charitable and non-profit organizations providing services or items in exchange for donations as part of their fundraising efforts. This could include branded merchandise, event tickets, or even memberships. Now, if you receive such a benefit, you can deduct only that portion of your donation that goes beyond the fair market value of the received benefit.

  To put it simply, if tickets to a charity concert are priced the same as regular concert tickets, that expense cannot be claimed as a deduction. However, if the tickets are priced higher, with the extra amount going to the charity, you can consider the surplus deductible.

• Value of your time or services: You cannot claim a deduction for the worth of your volunteered time or services, which includes:

  • Donating blood to organizations like the American Red Cross or blood banks
  • The monetary value of income you forego while volunteering without pay for a qualified organization

• Your personal expenses: You are not eligible to deduct expenses related to personal, living, or family needs, including the expenses for meals consumed while providing services for a qualified organization, unless it’s required for you to stay away from home overnight during the service.

• Qualified charitable distribution from an IRA: A qualified charitable distribution (QCD) refers to a direct distribution from the trustee of your individual retirement arrangement (IRA), excluding SEP or SIMPLE IRAs, to specific qualified organizations. You must have been at least 70 and a half years old when the distribution occurred, and the total QCDs for the year cannot exceed $100,000. If all conditions are met, a QCD may not be subject to taxes. However, if the QCD is considered nontaxable, it may not be eligible for a charitable contribution deduction. You may be able to claim this deduction if you report the income you’re deducting as a qualified contribution.

• Appraisal fees: You are not allowed to claim fees paid to determine the fair market value (FMV) of donated property as a charitable contribution.** **

• Certain contributions to donor-advised funds: You cannot claim a deduction for a donation to a donor-advised fund if, for instance:

  • The fund is sponsored by a war veterans’ organization, a fraternal society, or a non-profit cemetery company.
  • You do not have an acknowledgment from the sponsoring organization confirming its exclusive legal control over the contributed assets.

• Certain contributions of partial interests in property: Usually, you cannot claim a deduction for a contribution that represents less than your complete ownership interest in a property.

How Can I Substantiate My Charitable Contributions?

If you contributed in cash

If you’ve made a cash contribution to a qualified organization - whether through cash, check, debit/credit card, electronic funds transfer, online payment services, payroll deduction, etc. - you must have at least one of the following to substantiate it for tax-deduction purposes:

• A bank record with the qualified organization’s name and the amount and date of the contribution (these records could be bank or credit card statements, canceled checks, etc.)
• Some form of written communication (including email) from the qualified organization with its name and the amount and date of the contribution
• If a donor makes charitable contributions through payroll deduction, they can provide a pledge card created by the charitable organization or under its guidance, along with one of the following documents:
  • A pay stub
  • Form W-2, which is the Wage and Tax Statement
  • Any other document furnished by the employer that demonstrates the amount withheld and subsequently paid to a charitable organization

To claim a deduction of $250 or more, you need to have a “contemporaneous written acknowledgment of your contribution” from the qualified organization you donated to or certain payroll deduction records.

What is a contemporaneous written acknowledgment?

The acknowledgement must be written and include the following information:

• How much you contributed
• Whether you got any goods/services as a result (if yes, a description and estimate of its value)
• The date of your contribution (in the absence of which you need some bank record to substantiate the date)

Also, you need to get it on or before the date you file your return for the year that you make the contribution or the due date, including extensions, for filing the return.

If you made a non-cash contribution

The substantiation requirements depend on the value of your contributions:

• Below $250: You need a receipt from the organization containing the name and address of the organization, the date and location of your contribution, and a description of the property in sufficient detail. For a security, you also need the name of the issuer, the type of security, and whether it is publicly traded as of the date of the contribution.
• From $250 to $500: You need to have a contemporaneous written acknowledgement.
• From $500 to $5,000: You need to have a contemporaneous written acknowledgment and file Form 8283.
• Above $5,000: You must have a contemporaneous written acknowledgment, a qualified written appraisal of the donated property from a qualified appraiser, and file Form 8283.

If you have unreimbursed out-of-pocket expenses

If you provided your services to a qualified organization and have unreimbursed out-of-pocket expenses of $250 or more (say you paid $250 for a ticket to attend a convention of a qualified organization as a representative), related to those services, you need to have the following:

• Records to prove the amount of those expenses
• A contemporaneous written acknowledgement containing, among other things, a description of your services and information on whether you were reimbursed in terms of goods/services (if yes, a good faith estimate of the value of that good/service)

How Do You Report a Charitable Contribution?

You should report your charitable contributions on Schedule A (Form 1040), lines 11 through 14. If you’ve made non-cash contributions, you may need to fill out parts of Form 8283.

Deadline to remember

If you want your charitable contribution to be considered tax deductible when you file your return, you must ensure that you make it by the end of the tax year. For example, if you want to claim a charitable contribution on your 2023 returns (which you’ll file in April 2024), you will need to make that donation by December 31, 2023, for it to be deductible.

Should I Itemize to Claim This Deduction?

Yes. You need to itemize to claim this deduction.

While filing your taxes, you can take one of two approaches: You can either itemize your deductions or claim the standard deduction. So, you reduce your taxable income by subtracting whichever is higher - the standard deduction or your total itemized deductions, which includes your charitable contributions.

Here’s the standard deduction for 2023.

Filing Status	2023 Standard Deduction
Single	$13,850
Married and filing jointly	$27,700
Married and filing separately	$13,850
Heads of household (single adults with dependants such as children)	$20,800
Surviving spouses	$27,700

Additional standard deduction

For 2023, the additional deduction is $1,500 ($1,850 for single filers and heads of households), which would be $3,000 or $3,700 for people who are over 65 and blind based on their filing status.

Can I Claim the Standard Deduction and Deduct the Contribution?

No, you cannot. While this was an option for tax years 2020 and 2021 as a result of a temporary tax law - the Coronavirus Aid, Relief and Economic Security Act (CARES Act) - where taxpayers could claim up $300 or $600 (married filing jointly) in cash donations to qualified organizations on their taxes without itemizing, this benefit has expired.

Key Takeaways

• Charitable contributions can result in tax deductions, providing a practical benefit in addition to the altruistic reward.
• A charitable contribution is a voluntary donation or gift made to a qualified organization, without expecting anything of equal value in return.
• In the US, you can claim deductions on your federal tax returns for charitable contributions, typically capped at a maximum of 60% of your adjusted gross income (AGI).
• Qualified charitable organizations must meet criteria established under Section 501(c)(3) of the Internal Revenue Code.
• Examples of qualified organizations include religious groups, well-known non-profits like the American Red Cross, educational entities, non-profit hospitals, and others dedicated to various causes.
• Contributions can be made in the form of money or property.
• Certain types of contributions, such as those directly benefiting a specific individual or given to non-qualified organizations, are not tax-deductible.
• Donations that provide a benefit in return, like event tickets or merchandise, can only be partially deducted.
• Contributions of time, personal expenses, and certain fees (appraisal fees, for example) are not eligible for deductions.
• Documentation is crucial for substantiating charitable contributions, including bank records, written communications from organizations, and contemporaneous written acknowledgments.
• Non-cash contributions have specific substantiation requirements based on the value of the contributions.
• Charitable contributions should be reported on Schedule A (Form 1040) and, for non-cash contributions, Form 8283 may also need to be filled out.
• To claim a charitable contribution as tax-deductible, it must be made by the end of the tax year.
• To claim a charitable contribution deduction, you must itemize your deductions rather than take the standard deduction.
• The temporary option to claim up to $600 in cash donations without itemizing, which was available in 2020 and 2021 due to the CARES Act, has expired.

Conclusion

Understanding the tax treatment of charitable contributions can not only benefit the causes you support but also provide valuable deductions on your federal tax returns. It’s important to ensure your contributions meet the criteria for qualified organizations and maintain proper documentation to substantiate your donations.

The expiration of the temporary option to claim cash donations without itemizing serves as a reminder to carefully consider your approach to deductions. By navigating these guidelines, you can maximize the impact of your philanthropic efforts while also optimizing your tax strategy.