Introduction
According to a report by the Network for Good, 31% of all annual giving occurs in December, and 12% of all giving happens in the last three days of the year. Charitable giving is a cornerstone of American society, with individuals, corporations, and foundations contributing billions of dollars annually to non-profit organizations. The U.S. federal tax code, recognizing the societal value of these contributions, provides significant tax incentives for donors. This article will explore the intricacies of these tax benefits, referencing relevant sections of the tax code, case law, and providing practical examples to illustrate tax deductibility.
Disclaimer: This article is intended to provide general information about tax laws and regulations. It is not intended to provide legal or tax advice. Always consult with a tax professional or attorney for advice on your specific situation.
Understanding Charitable Contributions
Charitable contributions, as defined by the Internal Revenue Code (IRC) Section 170(c), are donations made to domestic governmental entities and organizations that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. These contributions can take various forms, including cash, property, or even volunteer services. However, it's important to note that not all donations qualify for a tax deduction. The IRS has specific rules and guidelines that dictate what constitutes a deductible charitable contribution.
Deductible and Non-Deductible Donations
Deductible donations include money or property given to qualified organizations, out-of-pocket expenses when serving as a volunteer, and mileage driven for charitable service. For example, if you donate $500 to a local food bank, that amount is fully deductible. Similarly, if you purchase $50 worth of supplies for a school fundraiser, that amount is also deductible.
Non-deductible donations, on the other hand, include contributions to political parties, political campaigns, or political action committees, contributions to individual people, contributions to for-profit schools and hospitals, and the value of your time or services. For instance, if you donate to a political campaign, that donation is not tax-deductible. Similarly, if you provide free services, like graphic design or legal work, to a non-profit organization, you cannot deduct the value of your time.
Tax Deductibility of Charitable Contributions
The tax benefits of charitable giving come in the form of deductions. When you make a charitable donation, you can deduct the amount of the donation or the fair market value of the donated property from your taxable income, thereby reducing your tax liability. However, there are limits to how much you can deduct in a given tax year.
As per IRC Section 170(b), individuals can deduct charitable contributions up to 60% of their adjusted gross income (AGI) in most cases. However, the CARES Act temporarily increased this limit to 100% of AGI for cash contributions made in 2020 and 2021. For example, if an individual with an AGI of $100,000 made a cash donation of $70,000 to a qualifying charity in 2021, they could deduct the full $70,000 from their taxable income due to the temporary increase in the deduction limit.
Corporate Charitable Contributions
Corporations, like individuals, can also benefit from tax deductions for charitable contributions. As per IRC Section 170(b)(2), corporations can generally deduct charitable contributions up to 10% of their taxable income. However, the CARES Act temporarily increased this limit to 25% for cash contributions made in 2020 and 2021.
For instance, if a corporation had a taxable income of $500,000 in 2021 and made a cash donation of $100,000 to a qualifying charity, they could deduct the full $100,000 from their taxable income due to the temporary increase in the deduction limit.
Itemizing vs. Standard Deduction
Deciding whether to itemize deductions or take the standard deduction is a critical decision that can significantly impact your tax liability. A tax professional will consider the total amount of your potential itemized deductions, including charitable contributions, mortgage interest, state and local taxes, and medical expenses, among others.
If your total itemized deductions exceed the standard deduction, it would be beneficial to itemize. For example, if you're a single filer and your itemized deductions total $15,000 in 2023, you would save more on taxes by itemizing, as the standard deduction for single filers is $12,950 as of my knowledge cutoff in 2021.
Conversely, if your total itemized deductions are less than the standard deduction, it would be more beneficial to take the standard deduction. For instance, if you're a single filer and your itemized deductions total $10,000 in 2023, you would save more on taxes by taking the standard deduction of $12,950.
Donating property, rather than cash, to a qualified charitable organization can also yield tax benefits. The type of property and its fair market value (FMV) play crucial roles in determining the tax implications.
Non-Cash Donations
Non-cash donations can include various types of property such as real estate, stocks, vehicles, clothing, and household items. The tax deduction for a non-cash donation is typically equal to the fair market value of the property at the time of the donation.
For example, if you donate a piece of artwork valued at $5,000 to a museum, you can generally deduct $5,000 on your tax return. However, there are exceptions and special rules for property that has appreciated in value, such as stocks or real estate.
Appreciated Property
If you donate property that has appreciated in value, like stocks or real estate, you can generally deduct the full fair market value of the property. This can be particularly beneficial because you avoid paying capital gains tax on the appreciation, which you would have to pay if you sold the property instead of donating it.
For instance, if you purchased stock for $2,000 and it's worth $10,000 when you donate it, you can deduct the full $10,000 and avoid paying capital gains tax on the $8,000 appreciation.
Record Keeping and Documentation
The IRS requires taxpayers to maintain records of their charitable contributions as per IRC Section 6001. For cash donations, this could be a bank record, a receipt from the charity, or a written statement from the charity. For non-cash donations, the documentation required depends on the value of the donation. For donations valued at over $500, taxpayers must fill out Form 8283 and attach it to their return. For some non-cash donations valued at over $5,000, a qualified appraisal may be required.
Case Law
The tax deductibility of charitable contributions has been the subject of numerous court cases. One notable case is Hernandez v. Commissioner, 490 U.S. 680 (1989), where the Supreme Court ruled that payments made for auditing sessions to the Church of Scientology did not qualify as charitable contributions because they were part of a quid pro quo exchange. This case underscores the importance of ensuring that donations are truly charitable and not made in exchange for goods or services.
Conclusion
Charitable giving can be a win-win situation, providing much-needed support to organizations while offering significant tax benefits to donors. However, the rules surrounding charitable contributions and their tax implications can be complex, with the tax code and case law providing important guidance. It's always advisable to consult with a tax professional to ensure you're maximizing your deductions and complying with all IRS requirements. Therefore, consulting with tax professionals or attorneys well-versed in U.S. tax laws is highly recommended. The team of legal professionals at VAdam Law is dedicated to offering customized counsel tailored to your unique circumstances to ensure adherence to all regulatory obligations, and clear and comprehensive advise.
If you would like to learn more about VAdam Law and schedule a free consultation, visit our online scheduling portal or call 24 hours a day at (954) 451-0792.
Sources:
1. Internal Revenue Code Section 170
2. Internal Revenue Code Section 63
3. Internal Revenue Code Section 6001
4. CARES Act 2020
5. Hernandez v. Commissioner, 490 U.S. 680 (1989)
6. IRS.gov
7. Tax Policy Center
