New York, NY - December 5, 2016 - Americans gave $373.25 billion in 2015. And with all that giving comes a sizable tax benefit. For example, a taxpayer with a marginal tax rate of 25 percent could save $25 in taxes for every eligible $100 donation.
Whether a donation is deductible or not can be straightforward in traditional situations, like for taxpayers who make regular contributions to their place of worship. But not all giving is that straightforward, especially with the technology and information sharing possible today.
For example, what if a taxpayer:
- Buys a product or service with a percentage of proceeds going to charity?
- Wins something from a charity auction?
- Wins or receives a donation made in their name?
- Gives a donation in someone else’s name?
- Gives personal space for a charity to use?
- Donates items rather than cash, like household goods or even a car?
- Donates something they received as a gift?
- Pools cash from friends and/or co-workers and donates for the group?
- Gives cash to a friend or co-worker who is donating for the group?
- Donates to an online fundraiser for someone’s medical bills or other financial needs?
- Sends a text to donate to a charity?
These situations don’t fit the traditional pattern for charitable giving, and some will qualify for a tax benefit while others will not. Taxpayers should ask themselves four questions in these situations to set themselves on the right track.
Is it a deductible contribution, or is it just generosity?
Taxpayers who want to get a tax benefit for their donations must give to a qualifying charity, which they can find using the IRS charity search tool. So while donating to a friend to help them cover their medical bills is generous, it is not deductible (for tax purposes).
Is it a donation, or is it a purchase?
Taxpayers cannot get a tax benefit for purchasing something from a charity. For example, buying Girl Scout cookies for personal consumption does not qualify as a charitable deduction. Likewise, giving to a charity and getting something in return will limit the charitable deduction the taxpayer can take by the fair market value of what they received.
Is it a gift, or is it a re-gift?
Giving to a charity is not deductible if the taxpayer has no financial investment or basis in the gift. For example, taxpayers cannot deduct the value of a gift given in their name by somebody else.
Similarly, taxpayers can claim a deduction for contributing property but the amount may be limited to the fair market value of the item, the proceeds from its sale by the charitable organization or the taxpayer’s basis in the item. For example, a taxpayer who donates a car with a $3,000 fair market value cannot deduct $3,000 if the organization was only able to sell the car for $2,500.
Is it documented, or is it undocumented?
Taxpayers need to understand and comply with documentation requirements to substantiate their donations. Giving cash to a friend with the intent of relaying it to charity would not meet documentation requirements. Giving via text message can be deductible if the charge is added to the taxpayer’s telephone bill or wireless account.
And before choosing to itemize deductions (including any donations), taxpayers need to make sure the standard deduction – $6,300 for single filers and $12,600 for married taxpayers filing jointly – is not larger than all their itemized deductions, including charitable donations. If the standard deduction is larger, they will get a bigger tax benefit if they do not itemize.
For gray situations and specific contributions, taxpayers should talk to a qualified tax professional to make sure they meet all requirements for charitable deductions.