What is a Charitable Donation?
Every year, individuals and businesses trim their tax bills by making charitable contributions. Most of us are familiar with the idea of donating something to a charity and “writing it off.” But there is often some confusion about exactly what this means. Some believe that you can deduct contributions to any organization you want. Others insist that you can deduct the value of time spent volunteering. In fact, both of these ideas are wrong.
Below, we’ll explain what charitable contributions really are and how they work:
The Technical IRS Definition
A charitable contribution is when you donate money (including securities or business ownership interests), goods or services to an organization and deduct the market value of this contribution on your income tax return. An IRS webpage elaborates:
“Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.”
Here, “qualified organizations” is the phrase to pay attention to. The IRS does not allow you to “donate” money to your Uncle Bob up the road or the pizza shop downtown and deduct it from your income taxes. Generally, the only types of organizations you can legally deduct your contributions to are nonprofits. But not all nonprofits qualify. More specifically, an organization must have a religious, educational, literary, charitable or scientific purpose and 501(c)(3) status from the IRS. If you are unsure whether an organization qualifies, use this IRS search tool to figure it out.
Different Forms of Contributions
As noted, you are permitted to donate and deduct the value of things other than money. In addition to cash, you can also donate
- Collections of valuable items
- Real estate
All of these make you (the donor) eligible for a tax deduction. There are limits, though. If the value of your non-cash charitable contributions exceed $500, you’ll need to fill out specific forms (discussed below) to qualify for a deduction. Here’s how to donate your time, property, and cash.
People often ask whether volunteer work entitles them to a tax deduction. After all, they say: ten hours of my time has a market value. If that’s what I gave to Habitat For Humanity, can’t I deduct it? Logical and justified as this may seem, it’s actually not legal, according to the IRS. The value of your time is different than the value of someone else’s time, and the IRS can’t be bothered to verify what you say your time is worth. Or how many hours you really volunteered for. Nor can you deduct any personal expenses connected with volunteering (like the cost of putting your children in daycare.) What you can deduct are costs that relate directly to your volunteer work, including:
- Uniforms or supplies
- Air or bus transportation
Again – receipts are necessary for all of these deductions, and you’ll be expected to produce them if audited at some future date.
Required Forms & Paperwork
The IRS is used to seeing dishonest taxpayers try to lower their income tax bills with bogus deductions. That’s why when it comes to making charitable contributions – and getting the deductions you are entitled to – documentation is everything. Any contribution (cash or noncash) of $250 or more requires that you get “contemporaneous written acknowledgement” – in other words, a receipt – from the charity you donated to. Then there’s IRS Form 8383, which must be filled out for non-cash donations exceeding $500 in value as well as noncash property worth more than $5,000. In the latter case, you’ll also need to attach a “qualified appraisal” of the property (and fill out Section B of Form 8283).
Qualified appraisals are required or suggested for other non-cash contributions as well. Donated artwork valued at $20,000 or more, for instance, should be accompanied by not only a signed appraisal, but also pictures of the works in question.
“Quid Pro Quo” Contributions
Some charities now try to “sweeten the deal” by offering incentives for people to donate more. Kars4Kids, for instance, proudly advertises that anyone who donates old cars to to them will get free vacation vouchers to a U.S. city of their choice. At first, this might seem too good to be true. A tax deduction, and free stuff? Unfortunately, it is to good to be true. As the IRS makes crystal clear:
“If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.”
In other words: if the vacation voucher or sporting event ticket you receive is worth as much as whatever you donated, you get no deduction. This does not necessarily mean you shouldn’t donate something – only that doing so triggers no tax benefits.