Donations to non-profits whose work you value

Relief under Income Tax

*Sections of this blog post were taken from the Turbo Tax site, the IRS site, and veneble.com. All sources are cited.

Contributing towards non-profits or charitable organizations is a fulfilling and somewhat low-effort act on our part that contributes to humanity. Still, you’ll want to at least understand how these can affect your taxes so that you file accordingly, and make sure you don’t end up losing money that could affect the generosity of your contribution in future years.

First, it is important to know that for tax purposes, the law classifies charities and nonprofits according to their mission and organizational structure. Each group must register with the IRS for the section of the law that applies to it.

Religious and charitable organizations fall under section 501(c)(3) and can receive tax-deductible donations.

We read this article on TurboTax on charitable contributions and it explains the rules covering income tax deductions.

https://turbotax.intuit.com/tax-tips/charitable-contributions/charitable-contributions-you-think-you-can-claim-but-cant/L2XxnoskD

You can find a more comprehensive discussion of these rules in Publication 526, Charitable Contributions, and Publication 561, Determining the Value of Donated Property. For information about the substantiation and disclosure requirements for charitable contributions, see Publication 1771.

https://www.irs.gov/pub/irs-pdf/p526.pdf

https://www.irs.gov/pub/irs-pdf/p561.pdf

https://www.irs.gov/pub/irs-pdf/p1771.pdf

1. A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
2. A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
3. A church, synagogue, or other religious organization;
4. A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
5. A nonprofit volunteer fire company;
6. A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
7. A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
8. A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

Timing of Contributions

Contributions must actually be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.

Deductible Amounts

If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made.

The rules relating to how to determine fair market value are discussed in Publication 561, Determining the Value of Donated Property.

Limitations on Deductions

In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however.

The 50 percent limitation applies to (1) all public charities (code PC), (2) all private operating foundations (code POF), (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2-1/2 months following the year of receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.

The 30 percent limitation applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE).

A special limitation applies to certain gifts of long-term capital gain property. A discussion of that special limitation may be found in Publication 526, Charitable Contributions.

Foreign Organizations

IRS rulings permit a U.S. charity to conduct all or part of its charitable activities in a foreign country. Thus, even though an individual taxpayer would not receive a tax deduction for making a donation to a foreign charity, such taxpayer could make a tax-deductible donation to a U.S. charity that conducts charitable activities in a foreign country.

For example, a common method for U.S. persons to support international charitable activities is to make a donation to a U.S. "friends of" organization, typically a U.S. charity that supports a well-known foreign charitable or cultural institution (e.g., American Friends of the Louvre). So long as the "friends of" organization complies with IRS guidelines designed to ensure that the "friends of" organization retains ultimate control and discretion over the donations it receives and is not a mere conduit for donations to the foreign charity, U.S. donors can make tax-deductible contributions to the "friends of" organization.

This article covers options for International philanthropy for those filing taxes in the United States:

https://www.venable.com/insights/publications/2019/07/charity-abroad-us-donors-options-for-international

Other than this, direct contributions to foreign charities generally are not tax-deductible; however, special rules apply to charitable organizations in Canada, Israel and Mexico. But deduction for a contribution to a Canadian organization is not allowed if the contributor reports no taxable income from Canadian sources on the United States income tax return, as described in Publication 597.

While a domestic charity can use contributions abroad, it cannot merely transfer them to a foreign charity.

The organizations listed in Tax Exempt Organization Search with foreign addresses are generally not foreign organizations but are domestically formed organizations carrying on activities in foreign countries. These organizations are treated the same as any other domestic organization with regard to deductibility limitations.

Certain organizations with Canadian addresses listed may be foreign organizations to which contributions are deductible only because of tax treaty. Besides being subject to the overall limits applicable to all your charitable contributions under U.S. tax law, your charitable contributions to Canadian organizations are subject to the U.S. percentage limits on charitable contributions, applied to your Canadian source income.

Except as indicated above, contributions to a foreign organization are not deductible.