Charitable Contributions Tax Deductions Text Size:

Taxpayers are allowed to take deductions on their federal income taxes for charitable contributions. However, there are certain rules that taxpayers must follow in order to take such a deduction. For example, if you want to claim a deduction for a charitable donation, you must make the donation to a permissible charitable donee (which is the organization that receives the gift). If you fail to follow the rules governing deductions for charitable donations, the Internal Revenue Service (IRS) will not allow the deduction.

Rules for Deductions

The rules governing deductions for charitable contributions are found in 26 U.S.C.S. § 170 (also called I.R.C. § 170). There are five principle sets of rules or requirements for deductions. These include the following:

The donation must be made to a permissible charitable donee. That is, the donee must be an organization that fits within the categories given in I.R.C. § 170. These organizations include domestic government units, such as states, possessions of the United States, the United States itself, the District of Columbia, and their political subdivisions. However, to be deductible, the contribution or gift must be made exclusively for public purposes. For example, a taxpayer's contribution to a city's police department for use as an award for information on a crime is deductible. The city police department is a qualified organization, and the contribution is for a public purpose.

Other permissible charitable donees include veterans organizations, fraternal organizations, and non-profit cemetery companies.

The claimed deductions cannot be too large in any given year. They must fit within the "percentage of adjusted gross income (AGI)" amounts written into I.R.C. § 170. There are four percentage limitations as to contributions by individual taxpayers:

• The main limitation is the 50 percent limitation: the taxpayer may deduct, in a given tax year, contributions made to public charities and certain other organizations only up to 50 percent of his AGI for that year.
• Contributions to other types of charitable donees which do not meet the 50 percent limit qualifications and contributions for the use of (not to) charitable organizations are subject to a 30 percent limitation.
• Contributions of capital gain property to 50 percent limit organizations are subject to a separate 30 percent limitation. Capital gain property is property which can be sold for a higher amount than the taxpayer paid for it.
• Contributions of capital gain property to 30 percent limit organizations are subject to a 20 percent limitation.

If your deduction is limited because the percentage limitations have been exceeded, it's possible to take a deduction for the excess amounts on future tax returns, for the next five succeeding tax years. This is called carrying forward the deduction.

The donation must satisfy the conditions for being "payments," "gifts," or "contributions," as those terms are used in I.R.C. § 170. To be considered a deductible contribution, the payment must take one of four forms:

• Cash
• Property other than cash (including part of a bargain sale of property to a charity)
• An out-of-pocket expense paid by the taxpayer in connection with working on behalf of the charity
• Amounts paid by the taxpayer to maintain certain students as part of the taxpayer's household

Also, you can't keep any control over a donation, and you must not have received a benefit in return from the charity. If you receive such return benefit, only the excess of the contribution over the benefit may be deducted.

The contributions must be properly valued. In general, when non-cash property is contributed, the amount of the deduction is measured by the fair market value of the property. Fair market value is the amount a willing buyer would pay and a willing seller would accept for the property. It is usually the price the property would bring when sold to the typical end user of for the property

If the IRS challenges the deduction, the taxpayer must have the records to back it up. Each contribution of $250 or more, whether made in cash or property, must be supported by a written receipt from the donee organization. The receipt should include the amount contributed, whether the organization gave the donor any goods or services in return for the donation (other than token items and membership items), and a description and good faith estimate of the value of those returned goods and services. There are more requirements for contributions of property when the deductions claimed exceed $500, $5,000, or $500,000. In some cases, a qualified appraisal must be obtained and attached to the return claiming the deduction. When the amount contributed exceeds $75 and the taxpayer receives in return items of value, the charity is required to provide a statement of information.

If you have any questions about the requirements for deducting charitable contributions, contact a tax lawyer in your area.

Questions for Your Attorney

• Can I take a tax deduction for the time that I spent volunteering for a charitable organization?
• If I receive a gift when I make a donation, is the full amount of my donation tax deductible?
• What determines whether a charity is a 50 percent limit organization or a 30 percent limit organization?

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