Most people know that contributions to charities are tax deductible, if you itemize your deductions. However, not all organizations that you might think of as charitable are qualified to receive tax-exempt donations. In addition, there are certain types of gifts that are not deductible even if they are made to a qualified charity. This article covers some of the rules about when a gift to a charity or organization might not be tax deductible.
Charity Must be a "Qualified Organization"
Only contributions to what the IRS calls “qualified organizations” are deductible. These consist mainly of public charities—organizations that come under Section 501(c)(3) of the Internal Revenue Code. These are the myriad of nonprofits that engage in charitable, religious, scientific, literary, or educational work. If a nonprofit has obtained a determination letter from the IRS recognizing its status as a 501(c)(3) public charity, then it is a qualified organization and donations to it are deductible. Many nonprofits include copies of their IRS determination letter on their website and their taxpayer identification number on fundraising solicitations so donors know they can deduct donations to their organization. The only 501(c)(3) organizations that are automatically considered qualified organizations (without a determination letter from the IRS) are churches and other religious organizations.
The IRS maintains a list of qualified organizations in Publication 78, which is available on its website. You can also call the IRS at 877-829-5500 to determine if an organization is qualified. Other organizations maintain even more extensive lists of nonprofits. For example, the website www.guidestar.org lists over 1.5 million nonprofits. These are all valuable resources potential donors can check to see whether an organization they are making a donation to is a qualified organization.
Not all qualified organizations, however, are listed in IRS Publication 78. Section 501(c)(3) nonprofits whose annual gross receipts are normally under $5,000 and religious organizations such as churches, synagogues, and mosques don’t have to apply to the IRS for tax-exempt status and are often not listed.
Earmarked Gifts Are Not Deductible
What if you want to make a contribution that benefits a particular person? This happens all the time. For example, someone may know a family that can’t afford to pay their child’s tuition and may want to donate money to a nonprofit school to cover that child’s tuition. While the intention on the donor’s part is still charitable in nature, these types of gifts are not tax deductible. A donor can never earmark a charitable contribution for a particular individual.
Conditional Gifts Are Deductible (If Act Occurs)
Sometimes nonprofits or donors wish to make a gift subject to conditions—that is, the contribution is conditioned on the performance of an act by the charity or the occurrence of an event. For example, you agree to give your Church $10,000 if it raises an additional $10,000 over the next month.
If the act or event doesn’t occur in the time allotted, the contribution is returned or need not be made. Such a contribution won’t be deductible until the act or event occurs, unless the chances of it not happening are ”so remote as to be negligible.”
Gifts to Most Foreign Charities Are Not Deductible
Subject to exceptions for Canadian, Mexican, and Israeli charities, contributions to foreign charities are not deductible. If you want to help people in foreign countries and deduct your contribution, you must donate to a United States nonprofit, not directly to a charity in a foreign country. The United States nonprofit can either spend the funds abroad itself, or transfer funds to a charitable foreign organization—but the nonprofit must control how the funds are used.
Canadian, Mexican, and Israeli charities receive special treatment because the United States has signed tax treaties with them requiring it. Americans may deduct donations to charities in these countries if, and only to the extent that, the donor has income from that country.
Donors may deduct contributions to Canadian or Mexican nonprofits that satisfy the requirements to be a qualified nonprofit under United States law. In addition, contributions to these foreign organizations are subject to the IRS percentage limits on charitable contributions, which is applied to the donor’s income from Canada or Mexico. These rules limit the annual deduction to 50% of the donor’s adjusted gross income from the foreign country. (The limits do not apply to contributions to a Canadian college or university at which the donor or a family member is or was enrolled.)
An American may deduct contributions to any nonprofit recognized under Israeli law. However, the total deduction allowed for contributions to Israeli nonprofits is limited to 25% of the donor’s adjusted gross income from Israeli sources.