The words "your contribution is tax deductible" are music to a donor's ears. While getting a tax deduction is not the sole motivation for most charitable donations, it has always been an important factor. Indeed, prior to the enactment of the Tax Cuts and Jobs Act (TCJA), about 85% of all charitable contributions were made by individuals who deducted their donations. However, as a result of tax changes brought about by the TCJA, far fewer taxpayers will be able to deduct their donations than in the past. This is expected to have a negative impact on charitable giving.
Whether a donation is deductible depends on a number of factors -- including who the donation is given to, when the donation is made, the purpose of the donation, and the donor's particular tax situation. An identical contribution may be deductible by one donor, but not by another.
To complicate matters, the IRS imposes restrictive rules on donations. These rules require thorough documentation and tax filings by both nonprofits and the people making donations to them. In some cases, the rules limit the amount that the donor can deduct.
The words "contribution," "donation," or "gift" are typically used to refer to money or property received from a donor. These words mean essentially the same thing and are often used interchangeably. In the nonprofit world, however, people tend to use the word donation for small gifts -- say an item of clothing -- and reserve the word contribution for larger gifts -- real estate, for example.
Charitable deductions are claimed by donors on their individual tax returns (IRS Form 1040). It is up to the donor and his or her tax adviser -- not the nonprofit that receives a donation -- to determine how much to deduct, and when and how to deduct it. The nonprofit's role in the charitable tax deduction process is fairly limited. Subject to some important exceptions, a nonprofit is not required to report donations to the IRS or make any tax filings when it receives a donation. The nonprofit's main responsibility is to make sure it complies with any substantiation and documentation requirements for the donations it receives.
The Tax Cuts and Jobs Act, which went into full effect on January 1, 2018, retains the longstanding personal tax deduction for charitable contributions. In fact, it enables taxpayers to deduct more. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year.
However, far fewer taxpayers will be able to deduct their charitable contributions than in the past. This is because taxpayers may deduct such contributions only if they itemize their personal deductions instead of taking the standard deduction. The TCJA roughly doubled the standard deduction and eliminated or limited many personal deductions. As a result, only about 5% of taxpayers will be able to itemize for 2018 and later, compared with 30% in prior years. Thus, the pool of donors who will be able to deduct their charitable contributions will be much smaller than in the past.
The changes brought about by the TCJA have not changed this basic truth: Whether -- and to what extent -- a donation is tax deductible depends on a donor's particular tax situation. Donors, with the help of a tax adviser if necessary, must apply the general deductibility rules to their specific circumstances. Each donor's situation is unique and will affect how much that person can deduct, or whether a donation is deductible at all. Thus, no matter what role you have at your nonprofit, you should never give a donor specific legal or tax advice on donations. You are not the donor's lawyer or tax adviser.
This is also why blanket statements in fundraising solicitations or thank you letters such as "your contribution is tax deductible" -- while they may be technically accurate and perfectly legal -- are misleading, particularly in light of the new tax law. Instead, in letters to donors you should state that your nonprofit is a Section 501(c)3 nonprofit and (if potentially true) that their gift may qualify as a charitable deduction for federal income tax purposes. It's also a good idea to advise donors to consult with their tax advisers or the IRS to determine whether a contribution is deductible, or if they are confused about the impact of the new tax law. Never promise or assure a donor that a contribution is deductible.
That said, it is never in a nonprofit's interest to lose a valuable charitable deduction because the donor didn't understand the tax rules. Likewise, it is not good for a donor to make a contribution thinking it will be deductible when it is not or that it will save more in taxes than it really will. In either case, you'll end up with a disappointed or angry donor who may decide not to make any more contributions to your nonprofit.
While not everyone at your nonprofit needs to become an expert on charitable contribution tax rules, it is helpful if some key people on your staff -- particularly those involved in fundraising efforts -- understand the basic charitable deduction rules. This might include your:
Your fundraising strategies should always take into consideration the tax effect of a donation. IRS rules make some types of donations easier or more advantageous tax-wise than others—for example, there are substantial tax benefits to donating publicly traded stock that has gone up in value since it was purchased.
There are also strategies donors can use to enable them to itemize their deductions so they may deduct their charitable contributions. Chief among these is bunching charitable deductions into a single year so that the donor has enough deductions to itemize. One way to do this is for a taxpayer to open a donor-advised fund and “front-load” several years worth of donations into one year.
You can use fundraising letters, emails, and other communications to explain to potential donors the tax benefits of particular types of donations and donation strategies. Your nonprofit can also help make sure that your donors understand the current IRS requirements for deducting donations by posting basic information on your website, perhaps in the form of FAQs (frequently asked questions). You can also refer donors to the IRS publication on the subject, IRS Publication 526, Charitable Contributions.
If your nonprofit provided any goods or services in exchange for a donation -- for example, an umbrella in return for a donation, a meal at your anniversary gala, or a fruit basket in return for the donor's winning bid at your silent auction -- only a portion of the donor's contribution is tax deductible. The donor should not claim a tax deduction for the portion of the donation that paid for the fair value of the goods and services (unless that value was relatively insubstantial, as described under, "Is Your Nonprofit Overpromising Tax Deductions?").
The technical way of saying this is "The tax deduction is limited to the excess of the contribution over the fair market value of any items received in exchange for the donation." To help donors estimate the deductible portion of a donation, you can include one of the following statements in a receipt or thank you letter, depending on the circumstances: No goods or services of any value were provided to you in exchange for your donation. Or: The estimated value of goods or services provided in return for your donation is $_____.
In all thank you letters, its a good idea to include the following reminder for donors: Please keep this written acknowledgment of your donation for your tax records.
For more information on charitable giving and other nonprofit tax issues, see Every Nonprofit's Tax Guide: How to Keep Your Tax-Exempt Status and Avoid IRS Problems, by Stephen Fishman (Nolo).