The best way you can help the victims of natural disasters like the California wildfires or recent hurricanes that have affected several states is to send money to one of the many charities providing aid. However, not everyone has spare money lying around they can donate to disaster victims. Luckily, your employer may provide you with an alternative method of helping out: donating the cash value of your unused vacation time or sick leave.
Many employers have established leave donation programs enabling their employees to make such donations. To do so, you simply tell your employer to convert a specified amount of your vacation time and/or sick leave into cash and to pay the money to a charity. The IRS says your employer should value your donated vacation time or leave based on your normal rate of compensation. For example, if you make $40 per hour and you elect to donate 10 hours of your accrued vacation time, your employer should donate $400.
Unfortunately, under normal rules, donating your vacation time or sick leave does often not work out well tax-wise. Ordinarily, if you elect to receive the cash value of your vacation time or sick leave, the amount must be included in your employee wages and is fully taxed. This is true even if you give the money to charity. You can receive a charitable donation deduction by giving the money to a charitable organization, but this deduction is available only if you itemize your personal deductions. Due to changes brought about by the Tax Cuts Jobs Act—especially a near doubling of the personal deduction—far fewer taxpayers will be able to itemize than in the past. No more than 5% of taxpayers are expected to itemize during 2018 and later, compared with 30% in prior years.
Fortunately, the IRS is aware of this problem and has periodically made special tax relief available to employees who participate in leave-based donation programs. It did this a few years ago for Hurricane Sandy. It is doing so again for employees who donate the cash value of their vacation or sick leave to victims of:
Under this special relief, the cash value of the donated leave is not be included in employees’ wages—that is, it need not be included in your W-2, and you need not list the amount on your tax return or pay any tax on it. No tax is withheld from the amount. Your employer will be permitted to deduct the cash payments as a business expense. However, you may not claim a charitable contribution deduction for the cash value of the foregone vacation time or leave.
To obtain this tax treatment, the donation must be made before January 1, 2019. The money can be donated to any tax-exempt charitable organization providing relief to victims of any of the above disasters. Contributions to state, local, and federal governments also count. Some employers choose who to donate the money to. Others permit their employees to select the organization. Although not required, it is a good practice for the employer to indicate to the charity that the money is to be used for victims of one of the above disasters. (IRS Notice 2017-52.)