Making Charitable Contributions

Some guides pertaining to charitable contributions and related material.

Financial Guides

Since charities ask for larger and more frequent donations from the public these days, soliciting by mail, telephone, television, and radio, for example, they should be checked out before you donate money or time. Here are some tips on how to maximize your charity dollar and avoid scams.

Here are some basic, common-sense suggestions for avoiding rip-offs in making charitable contributions:

  • Do not contribute cash. All contributions should be in the form of a check or money order made out to the charity never to the individual soliciting the donation.
  • Do not be misled by a charity that resembles or mimics the name of a well-known organization–all charities should be checked out.
  • Ignore pressure to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.
  • When appropriate, ask for written descriptions of the charity’s programs and/or finances, especially if the intended contribution is substantial.
  • If you have any doubt about the legitimacy of a charity, check it out with the local charity registration office (usually a division of the state attorney’s general office) and with the Better Business Bureau (BBB).

Tip: You should, of course, keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.

Giving Your Time

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself:

  • Make sure you are familiar with the charity’s activities. Ask for written information about the charity’s programs and finances.
  • Be aware that volunteer work may require special training and the devotion of a scheduled number of hours each week to the charity.
  • If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Tip: Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

Mail Solicitations

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

  • The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal brings tears to your eyes but tells you nothing about the charity’s functions, investigate it carefully before responding.
  • It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
  • Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal as a lottery operated by mail.
  • Appeals that include surveys should not imply that you are obligated to return the survey.
  • Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.

Caution: Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.

Public Education Solicitations

If you respond to mail appeals, you should be aware that certain charities consider this to be a significant part of their educational budgets. In a recent survey, half of 150 well-known national charities included their direct mail and other fund-raising appeals in their public education programs. This practice makes fund-raising drives look like a smaller part of a charity’s expenses than they are. These 75 charities allocated $160 million of their direct mail and other appeal costs to public education programs.

Example: A charity whose purpose is to combat cruelty to animals uses direct mail to raise funds. The cost of a nationwide direct mail campaign is $1 million much more than the $200,000 the charity has budgeted for its program of research grants. This embarrassingly high allotment for fund-raising costs can be significantly reduced if the direct mail pieces include some information about cruelty to animals. Since the information is considered educational, the charity calls it a program expense and allots half the cost of the mailing to public education, thus reducing fund-raising expenses from $1 million to only $500,000, and bumping up program spending from $200,000 to $700,000.

The line between pure fund-raising and genuine public education activities is not always clear. However, if the charity is confident that the fund-raising appeal truly serves its educational purposes, it should be willing to disclose this fact in the appeal. This disclosure allows donors to make an informed decision about whether to support the activity.

Telephone, Door-To-Door, And Street Solicitations

When you are approached for a contribution of time or money, ask questions – and do not give until you are satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

  • Ask for the charity’s full name and address. Demand identification from the solicitor.
  • Ask if the contribution is tax-deductible.
  • Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.

Caution: Contributions to tax-exempt organizations are not always tax-deductible.

Caution: Registration, by itself, does not mean that the state or local government endorses the charity.

  • Do not give in to pressure to make an immediate donation or allow a runner to pick up a contribution.
  • Statements such as “all proceeds will go to charity” may mean money left after expenses, such as the cost of fund-raising efforts, will go to the charity. These expenses can be big ones, so check carefully.
  • When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity’s share will be. Sometimes the organization will receive less than 20 percent of the amount you pay.
  • If a fund raiser uses pressure tactics- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

Sweepstakes Appeals

Sweepstakes mailings, used by businesses for many years to promote their products, have recently become popular with charities. Here are some points to consider when reviewing a sweepstakes appeal.

    • The sweepstakes mailing should clearly disclose that no contribution is necessary to participate.

* If you wish to participate, read the sweepstakes promotion and direct mail contents carefully. Your entry may be discarded if the rules are not followed to the letter.

  • If the charity sweepstakes promotion says you are a pre-selected winner, you will usually receive a prize only if you respond to the sweepstakes. Most “pre-selected winners” receive just pennies per person.
  • Both donor and non-donor sweepstakes participants must have an equal chance of winning a prize.

Caution: For a national campaign, the probability of winning the big prize may be quite low. Some campaigns involve mailings of a half-million to ten million or more letters.

Caution: If you are considering a donation, check out the appeal as you would any other request for funds. Does it clearly specify the programs your gift would be supporting? Do not hesitate to ask for more information on the charity’s finances and activities.

Charity Thrift Stores

Since all charity thrift stores do not necessarily operate the same way, it is important to find out if the charity is benefiting from thrift sales. There are three major types of thrift store operations:

  • Conduit-type shops run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
  • Thrift operations are represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of “rehabilitation through employment.”
  • Charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store or (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed stores for an agreed-upon amount.

Tip: The fair market value of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the going rate for comparable items. If you are donating directly to a for-profit thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Tip: Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

Caution: If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party such as an independently managed thrift store, then ask what the charity’s share will be.

Tip: Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross or a flat fee per bag of goods collected.

Fund-Raising Dinners, Variety Shows, And Other Events

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

  • Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
  • Your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the fair market value of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.

Tip: If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

Caution: Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.

  • Watch out for statements such as “all proceeds will go to the charity.” This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20 percent or less of the price paid.

Tip: Ask the charity what anticipated portion of the purchase price will benefit the organization.

  • Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

Caution: It has happened that the number of children eligible to receive free tickets has been limited or transportation has not been arranged. So, in effect, free tickets given to the few needy children who attend the event are paid for many times over by businesses and individuals who purchase tickets.

Charity-Affinity Credit Cards

You may receive an offer to apply for an affinity credit card bearing the name and logo of a particular charity. Sometimes offered exclusively to an organization’s donors or members, these cards are issued by banks and credit card companies under agreements worked out with individual charities. These cards are just like other credit cards, but the specified charity gets some kind of financial benefit.

All affinity credit cards are not created equal. Offers vary in terms of how the charity benefits as well as the terms of the credit agreement with consumers. So check the terms carefully!

Caution: Consider the specific terms as you would any credit card offer: the amount of the interest rate/finance charges, the amount of the annual fee, if any, the amount of late fees and over-the-limit fees, if any, and the length of the grace period, or amount of time after which finance charges begin to accrue on any unpaid balance.

The charity usually receives a benefit in one or more of the following ways:

  • The charity receives a certain percentage of each purchase or a specified amount every time the consumer makes a purchase with the card,
  • The charity receives a certain dollar amount every time a new customer signs up for a card, or
  • The charity receives a portion of the annual renewal fee for the card.

Caution: Make sure the promotional literature states exactly how the charity benefits. For example, one affinity card offer declared that a specified national charity would receive half of one percent of all transactions made with the card (that works out to 5 cents for every $10 worth of purchases). If the financial benefit for the charity is not spelled out, then ask.

Caution: Contributions made by a bank and/or credit card company through the use of an affinity credit card are not deductible to consumers as charitable donations for federal income tax purposes.

Remember also to consider your interest in the charity and not to hesitate to seek out more information on the charity’s programs and finances.

Tip: If saving money is your bottom line, make a direct donation to the charity and seek a credit card with the best terms and lowest interest rates, regardless of affinity.

Charity/Business Marketing

The following points should be kept in mind when considering promotions that partner charities and businesses:

  1. Charity/business marketing campaigns should clearly disclose the actual or estimated portion of the purchase price that will benefit the specified cause. Without such information, you cannot know how much of your purchase will aid a charity participating in such a campaign.
  2. Read the disclosure carefully. Some charity/business marketing campaigns have an expiration period (for example, ten cents goes to the charity for all purchases made until October 31.) If there is no disclosure, be aware that the amount that goes to the charity is usually between one and ten percent of the retail price.
  3. In schemes during the Gulf War, businesses made no arrangements with the named charity and no contributions were given. Various items and services were sold with the false promise that a donation would be made to the USO or other organizations helping members of the armed services or their families. Similar advertising abuses commonly occur in the wake of hurricanes, floods and other natural disasters.
  4. Some advertisements falsely imply the existence of a direct connection between the consumers’ purchase and the charity when, in fact, the charity was guaranteed a “flat” contribution regardless of the level of the resulting purchases.

Disaster Appeals

The tragedy of a flood, massive fire, hurricane, earthquake, or another disaster always triggers an outpouring of public support and concern. During such crises, watch out for fraudulent appeals by some who see disasters as an opportunity to take advantage of American concern and generosity.

Examine your options instead of giving to the first charity from which you receive an appeal. There will be a variety of relief efforts responding to the diverse needs of disaster victims. Be wary of appeals that are long on emotion and short on what the charity will do to address the specific disaster.

Caution: Ask how much of your gift will be used for the crisis and how much will go towards other programs and to administrative and fund-raising costs. And find out what the charity intends to do with any excess contributions remaining after the crisis has ended.

Check with organizations before donating goods for overseas disaster relief. Most groups involved in overseas relief will not accept donated goods since purchasing goods overseas is often less expensive and more efficient. If a charity accepts donated items, ask about their arrangements for shipping and distribution.

Some charities change their program focus during a crisis in order to respond to the changing needs of disaster victims. Do not assume the charity will carry out the same activities throughout a crisis situation.

Police And Firefighter Appeals

In reviewing such appeals, potential donors should be aware of the following points.

  • Many different types of police and firefighter organizations exist. Some are charities that operate educational or youth programs. Others are labor organizations, fraternities, or benevolent associations that provide benefits to members.
  • Your gift may not be deductible. Police and firefighter organizations can be tax exempt under different sections of the Internal Revenue Code. Only some of them are eligible to receive deductible charitable donations.
  • Do not make assumptions based on the name alone. The words “police” and “firefighter” in the organization’s name do not necessarily mean that representatives from your local and/or state police or fire departments are members. In fact, the organization may not have any police or firefighter members.

Caution:

  • Ask about any affiliations the group might have with other organizations. Some groups operate as a lodge or chapter of a larger organization. Others are independent associations of local, state, and/or federal law enforcement officers.
  • Do not believe promises that your donation will “give you special treatment” from your police or firefighters. If such suggestions of threats are used, contact your state attorney general’s office and your Better Business Bureau.
  • Ask how your contribution will be used and what programs and activities it will support. Do not hesitate to ask for written materials on the police or firefighter group’s programs and finances.
  • Groups offering legitimate help to your police, firefighters, and community will welcome your questions and encourage your interest.

Child Sponsorship Groups

Not all sponsorship programs are alike. Sponsored donations usually benefit a project for an entire community (for example, medical care, education, food) and not the sponsored child exclusively. Some groups believe this is the most effective way to make significant and lasting changes in a child’s living conditions. Other organizations do give a certain amount of the contribution directly to the sponsored child. Before deciding to participate in a sponsorship program, you may want to consider the following:

  • Do you know how children are assisted (i.e., through a community development project operated by the charity or through an affiliated project that the group funds)?
  • Can you commit at least several years to a program in the form of financial assistance and letter-writing?
  • The child will not be your adopted child in any legal sense, and you will not be able to make any demands on him or her.
  • Do you agree with the overall philosophy of the organization (e.g., any religious focus a program might have)?

Tip: Contact other child sponsors to get a sense of their overall satisfaction with the organization.

A Charity’s National Office and Its Affiliates

While some organizations are a single entity under one name, others may be a network of local affiliates or chapters. If you give to a local chapter or affiliate, do not assume your donation will be spent locally. Nor should you assume that a chapter’s operations are fully controlled by the national office.

Many different types of relationships can exist between a charity’s national office and its chapters. Here are three possible relationships chapters:

  1. The national office performs certain functions, such as developing educational or fund-raising materials but does not supervise affiliates. In this case, the local chapters are incorporated separately from the national office and each applies for its own tax-exempt status from the IRS. Each local chapter’s programs and fund-raising is under the control of the chapter’s local board of directors. To support the national office, the local affiliates purchase materials produced by it or send it a small percentage of their locally collected funds.
  2. The organization’s national office and affiliates function as one centralized unit under the control of a national board of directors. All income and expenses are channeled through the national office. In this case, the chapters are not separate legal entities and have only limited authority, as stated in their charter agreements with the national office.
  3. Most national/chapter relationships fall somewhere between the two extremes in the preceding two paragraphs. In such a case, both the national office and the local affiliates share some level of authority. Local chapters may or may not be separately incorporated, but all have their own governing boards, some of which share control with the national office. The charity may have statewide affiliates that perform functions at the state level. With this structure, there is usually a fund sharing or dues formula between the local affiliates and the national office.

Caution: The bottom line for you is that, depending on the organization’s structure, the local affiliate may carry out different activities from those of the national office. It is important to inquire about this difference. In addition, donors may want to identify how much of a local affiliate’s contributions are spent on local programs.

Caution: When considering a donation to a local chapter, it is wise to check out the chapter separately.

Government and Non-Profit Agencies

  • Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
  • Contact the appropriate state government agency to verify a charity’s registration and to obtain financial information on a soliciting charity.
  • Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

This Financial Guide discusses the rules that apply when you contribute property–as opposed to money–to charity and is meant to provide general information. Contact your tax advisor if you need tax planning assistance.

Caution: The rules in this area are extremely complex. We urge you not to act on any transaction without seeking the proper advice.

If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed here, the amount of your deduction must be decreased.

After discussing how to determine the fair market value of something you donate, we’ll discuss the following categories of charitable gifts of property:

  • Contributions subject to special rules
  • Property that has decreased in value;
  • Property that has increased in value;
  • Food Inventory.
  • Bargain Sales.

Determining Fair Market Value

Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all of the relevant facts.

Used Clothing and Household Items.

The fair market value of used clothing and used household goods, such as furniture and furnishings, electronics, appliances, linens, and other similar items is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. Claim as the value of used clothing the price that buyers of used items actually pay clothing stores, such as consignment or thrift shops.

Be prepared to support your valuation of other household items with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items may be useful. (This documentation does not get filed with your return; it is kept on hand as proof.)

Note: No deduction is allowed after August 17, 2006 for household items in less than “good used condition.” However, deduction is allowed where the amount claimed for the item in less than good condition is more than $500 and a qualified appraisal supporting the valuation is filed with the return.

Cars, Boats, and Aircraft

If you donate a car, a boat, or an aircraft to a charitable organization, you must determine the FMV.

The FMV of a donated car, boat, or airplane is generally the amount listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. The FMV may be less than that, however if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear.

Similar is defined as the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle.

Boats. Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value.

If you donate a qualified vehicle to a qualified organization and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle’s fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you may have to reduce the fair market value to figure the deductible amount.

Paintings, Antiques, and Other Objects of Art.

 

Deductions for contributions of paintings, antiques, and other objects of art should be supported by a written appraisal from a qualified and reputable source unless the deduction is $5,000 or less.

    1. Art valued at $20,000 or more. If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10-inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
  1. Art valued at $50,000 or more. If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. You must request the statement before filing the tax return that reports the donation.

Large quantities. If you contribute a large number of the same item, fair market value is the price at which comparable numbers of the item are being sold.

Example: You purchase 500 Bibles for $1,000. The person who sells them to you says the retail value of these bibles is $3,000. If you contribute the Bibles to a qualified organization, you can claim a deduction only for the price at which similar numbers of the same Bible are currently being sold. Your charitable contribution is $1,000 unless you can show that similar numbers of that Bible were selling at a different price at the time of the contribution.

Contributions Subject to Special Rules

Special rules apply if you contribute:

  • Clothing or household items,
  • A car, boat, or airplane,
  • Taxidermy property,
  • Property subject to a debt,
  • A partial interest in property,
  • A fractional interest in tangible personal property,
  • A qualified conservation contribution,
  • A future interest in tangible personal property,
  • Inventory from your business, or
  • A patent or other intellectual property.

These special rules are described here briefly.

Used clothing or household items. You cannot take a deduction for clothing or household items you donate unless the clothing or household items are in good used condition or better. However, there is an exception. You can take a deduction for a contribution of an item of clothing or a household item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal of it with your return.

Car, boat, or airplane. A qualified vehicle is defined as a car or any motor vehicle manufactured mainly for use on public streets, roads, and highways, a boat, or an airplane. If you donate a qualified vehicle to a qualified organization and you claim a deduction of more than $500, you can deduct the smaller of:

  • The gross proceeds from the sale of the vehicle by the organization, or
  • The vehicle’s fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you may have to reduce the fair market value to figure the deductible amount

Taxidermy property. If you donate taxidermy property to a qualified organization, your deduction is limited to your basis in the property or its fair market value, whichever is less. This applies if you prepared, stuffed, or mounted the property or paid or incurred the cost of preparing, stuffing, or mounting the property.

Your basis for this purpose includes only the cost of preparing, stuffing, and mounting the property. Your basis does not include transportation or travel costs. It also does not include direct or indirect costs for hunting or killing an animal, such as equipment costs. In addition, it does not include the value of your time.

Taxidermy property means any work of art that:

  • Is the reproduction or preservation of an animal, in whole or in part,
  • Is prepared, stuffed, or mounted to recreate one or more characteristics of the animal, and
  • Contains a part of the body of the dead animal.

Property subject to a debt. If you contribute property subject to a debt (such as a mortgage), there are two possible ways your deduction might be reduced. First, special rules require you to reduce your deduction by certain interest payments you make. These rules prevent a double deduction of the same amount as both investment interest and a charitable contribution.

Second, if the debt is assumed by the recipient (or another person), you must reduce the fair market value of the property by the amount of the outstanding debt.

Note: If you sold the property to a qualified organization at a bargain price (discussed later), the amount of the debt is also treated as an amount realized on the sale or exchange of property.

Partial interest in property. Generally, you cannot deduct a charitable contribution (not made by a transfer in trust) of less than your entire interest in property. A contribution of the right to use property is a contribution of less than your entire interest in that property, and is not deductible.

There are important exceptions to this rule. You can deduct a charitable contribution of a partial interest in property if that interest fits one of the following categories:

1. A remainder interest in your personal home or farm. A remainder interest is one that passes to a beneficiary after the end of an earlier interest in the property.

Example: You keep the right to live in your home during your lifetime and give your church a remainder interest that begins upon your death.

2. An undivided part of your entire interest. This must consist of a part of every substantial interest or right you own in the property and must last as long as your interest in the property lasts.

Example: You contribute voting stock to a qualified organization but keep the right to vote the stock. The right to vote is a substantial right in the stock. You have not contributed an undivided part of your entire interest and cannot deduct your contribution.

Where it’s an undivided interest in tangible personal property (defined below) the donee must have possession of the property for a part of the year consistent with its interest in the property. Special rules apply for contributions after August 17, 2006, of further undivided interests in the same property by the same donor. And, for contributions after August 17, 2006, of undivided interests in tangible personal property, the deduction is “recaptured” if the donee doesn’t get all of the donor’s interest in the property by the earlier of 10 years from the first gift or the donor’s death.  “Recapture” means the deduction is added back to the donor’s income (say, in the 11th year), with interest due from the year of contribution and a tax penalty of 10 percent of the recaptured income.

3. A partial interest that would be deductible if transferred in trust.

4. A qualified conservation contribution (as specifically defined in the tax law).

Fractional Interest in Tangible Personal Property. A fractional interest in property is an undivided portion of your entire interest in the property. You cannot deduct a charitable contribution of a fractional interest in tangible personal property unless all interests in the property are held immediately before the contribution by you or you and the qualifying organization receiving the contribution.

Qualified Conservation Contribution. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization such as a governmental unit or publicly supported charitable, religious, scientific, literary or educational organization that is to be used only for conservation purposes.

The organization also must have a commitment to protect the conservation purposes of the donation and must have the resources to enforce the restrictions. Conservation purposes are defined as:

  • Preserving land areas for outdoor recreation by, or for the education of, the general public.
  • Protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem.
  • Preserving open space, including farmland and forest land, if it yields a significant public benefit. It must be either for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy.
  • Preserving a historically important land area or a certified historic structure.

If a building in a registered historic district is a certified historic structure, a contribution of a qualified real property interest that is an easement or other restriction on the exterior of the building is deductible only if it meets all of the following three conditions:

Future interest in tangible personal property. You can deduct the value of a charitable contribution of a future interest in tangible personal property only after all intervening interests in and rights to the actual possession or enjoyment of the property have either expired or been turned over to someone other than yourself, a related person, or a related organization.

Related persons include your spouse, children, grandchildren, brothers, sisters, and parents. Related organizations may include a partnership or corporation that you have an interest in, or an estate or trust that you have a connection with.

Tangible personal property. This is any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.

Future interest. This is any interest that is to begin at some future time, regardless of whether it is designated as a future interest under state law.

Example: You own an antique car that you contribute to a museum. You give up ownership, but retain the right to keep the car in your garage with your personal collection. Since you keep an interest in the property, you cannot deduct the contribution. If you turn the car over to the museum in a later year, giving up all rights to its use, possession, and enjoyment, you can take a deduction for the contribution in that later year.

Inventory. If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.

If the cost of donated inventory is not included in your opening inventory, the inventory’s basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory’s cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

A special rule applies to donations of food inventory (see Food Inventory below)

Patents and Other Intellectual Property. If you donate a patent or other intellectual property to a qualified organization, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less. After the legal life of the patent or other intellectual property ends, or after the 10th anniversary of the donation, no additional deduction is allowed. Also, additional deductions cannot be taken for patents or other intellectual property donated to certain private foundations. Intellectual property means any of the following:

  • Patents.
  • Copyrights (other than a copyright described in Internal Revenue Code sections 1221(a)(3) or 1231(b)(1)(C)).
  • Trademarks.
  • Trade names.
  • Trade secrets.
  • Know-how.
  • Software (other than software described in Internal Revenue Code section 197(e)(3)(A)(i)).
  • Other similar property or applications or registrations of such property.

Donating Property That Has Decreased in Value

If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property’s basis and its fair market value.

Common examples of property that decreases in value include clothing, furniture, appliances, and cars.

Donating Property That Has Increased in Value

If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction.

Again, your basis in property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is:

1. Ordinary income property, or

2. Capital gain property.

Ordinary Income Property

Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held 1 year or less.

Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.

Amount of deduction. The amount you can deduct for a contribution of ordinary income property is its fair market value less the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.

Example: You donate stock that you held for 5 months to your church. The fair market value of the stock on the day you donate it is $1,000, but you paid only $800 (your basis). Because the $200 of appreciation would be short-term capital gain if you sold the stock, your deduction is limited to $800 (fair market value less the appreciation).

Exception. Do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution.

Capital Gain Property

Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than 1 year.

Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.

For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year.

Real property. Real property is land and generally, anything that is built on, growing on, or attached to land.

Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.

Amount of deduction – general rule. When figuring your deduction for a gift of capital gain property, you usually can use the fair market value of the gift.

However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property’s cost or other basis.

This can happen where the charity’s use of tangible personal property is not in connection with its exempt purpose. For contributions after September 1, 2006, of more than $5,000, the deduction is generally reduced to basis if the charity disposes of the property within 3 years of the donation. If disposition takes place after the donation, the appreciation (fair market value less basis) is recaptured as ordinary income in the year of the disposition (absent certification from the charity that use for its exempt purpose occurred or was intended). The charity must notify IRS and the donor of the disposition ( and the certification, if applicable).

Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.

Example: You donate an installment note to a qualified organization. The note has a fair market value of $10,000 and a basis to you of $7,000. As a result of the donation, you have a short-term capital gain of $3,000 ($10,000 – $7,000), which you include in your income for the year. Your charitable contribution is $10,000.

Food Inventory

Special rules apply to certain donations of food inventory to a qualified organization. These rules apply if all of the following conditions are met.

  1. You made a contribution of apparently wholesome food from your trade or business. Apparently wholesome food is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
  2. The food is to be used only for the care of the ill, the needy, or infants.
  3. The use of the food is related to the organization’s exempt purpose or function.
  4. The organization does not transfer the food for money, other property, or services.
  5. You receive a written statement from the organization stating it will comply with requirements (2), (3), and (4).
  6. The organization is not a private non-operating foundation.
  7. The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act and regulations on the date of transfer and for the previous 180 days.

Bargain Sales

A bargain sale of property to a qualified organization (a sale or exchange for less than the property’s fair market value) is partly a charitable contribution and partly a sale or exchange.

The part of the bargain sale that is a sale or exchange may result in a taxable gain.

Penalty

The IRS may impose a penalty if you overstate the value or adjusted basis of donated property.

You must keep records to prove the amount of the cash and noncash contributions you make during the year. Which records you must keep depends on the amount of your contributions and whether they are cash or property contributions. New recordkeeping requirements were established for all contributions made after January 1, 2007. You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution, bank records (such as a cancelled check or bank statement containing the name of the charity, date, and the amount) or a written communication from the charity.

This Financial Guide discusses which records you must keep.

Cash Contributions

Cash contributions include those paid by cash, check, electronic funds transfer, debit card, credit card, or payroll deduction. You cannot deduct a cash contribution, regardless of the amount, unless it is substantiated by one of the following:

  1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
  2. A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
  3. Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Cash Contributions of $250 or More: You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your contribution from the qualified organization or certain payroll deduction records. If you made more than one contribution of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that lists each contribution and the date of each contribution and shows your total contributions.

To determine whether a contribution is $250 or more, do not combine separate contributions. For example, if you gave to the church $25 each week, your weekly payments do not need to be combined. Each payment is a separate contribution. The acknowledgment must be written and state whether you received any goods or services in return. If something was received in return, a description and good faith estimate of the value of the goods or services must be included.

For payroll deductions, the payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization. If the pay stub, Form W-2, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution.

Noncash Contributions

For a contribution not made in cash, these general rules apply:

The records you must keep depends on whether your deduction for the contribution is:

  1. Less Than $250
  2. At least $250 but not more than $500,
  3. Over $500 but not more than $5,000, or
  4. Over $5,000.

Amount of contribution. In figuring whether your contribution is $500 or more, combine separate contributions of similar items during the year. If you received goods or services in return, reduce your contribution by the value of those goods or services. If you figure your deduction by reducing the fair market value of the donated property by its appreciation, your contribution is the reduced amount.

Deductions of Less Than $250

If you make any noncash contribution, you must get and keep a receipt from the charitable organization showing:

  1. The name of the charitable organization,
  2. The date and location of the charitable contribution, and
  3. A reasonably detailed description of the property.

A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the information in (1), (2), and (3) will serve as a receipt. You are not required to have a receipt where it is impractical to get one (for example, if you leave property at a charity’s unattended drop site).

Additional records. You must also keep reliable written records for each item of donated property. Your written records must include the following information.

  1. The name and address of the organization to which you contributed.
  2. The date and location of the contribution.
  3. A description of the property in detail reasonable under the circumstances. For a security, keep the name of the issuer, the type of security, and whether it is regularly traded on a stock exchange or in an over-the-counter market.
  4. The fair market value of the property at the time of the contribution and how you figured the fair market value. If it was determined by appraisal, you should also keep a signed copy of the appraisal.
  5. The cost or other basis of the property if you must reduce its fair market value by appreciation.
  6. The amount you claim as a deduction for the tax year as a result of the contribution, if you contribute less than your entire interest in the property during the tax year. Your records must include the amount you claimed as a deduction in any earlier years for contributions of other interests in this property. They must also include the name and address of each organization to which you contributed the other interests, the place where any such tangible property is located or kept, and the name of any person in possession of the property, other than the organization to which you contributed.
  7. Any conditions attached to the gift of property.

Deductions of At Least $250 But Not More Than $500

If you claim a deduction of at least $250 but not more than $500 for a noncash charitable contribution, you must get and keep an acknowledgment of your contribution from the qualified organization. If you made more than one contribution of $250 or more, you can have either a separate acknowledgment for each or one acknowledgment that shows your total contributions.

The acknowledgement must contain the information in items (1) through (3) listed under Deductions of Less Than $250, earlier, and your written records must include the information listed in that discussion under Additional Records.

1. It must be written.

2. It must include:

  • A description (but not necessarily the value) of any property you contributed,
  • Whether the qualified organization gave you any goods or services as a result of your contribution (other than certain token items and membership benefits), and
  • A description and good faith estimate of the value of any goods or services described above. If the only benefit you received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

3. You must get the acknowledgment on or before the earlier of:

  • The date you file your return for the year you make the contribution, or
  • The due date, including extensions, for filing the return.

Deductions Over $500 But Not Over $5,000

If you claim a deduction over $500 but not over $5,000 for a noncash charitable contribution, you must have the acknowledgment and written records described under Deductions of At Least $250 But Not More Than $500. Your records must also include:

  1. How you got the property, for example, by purchase, gift, bequest, inheritance, or exchange.
  2. The approximate date you got the property or, if created, produced, or manufactured by or for you, the approximate date the property was substantially completed.
  3. The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. This requirement, however, does not apply to publicly traded securities.

If you are not able to provide information on either the date you got the property or the cost basis of the property and you have a reasonable cause for not being able to provide this information, attach a statement of explanation to your return.

Deductions Over $5,000

If you claim a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, you must have the acknowledgment and the written records described under Deductions Over $500 But Not Over $5,000. In figuring whether your deduction is over $5,000, combine your claimed deductions for all similar items donated to any charitable organization during the year.

Generally, you must also obtain a qualified written appraisal of the donated property from a qualified appraiser.

Qualified conservation contribution. If the gift was a “qualified conservation contribution,” your records must also include the fair market value of the underlying property before and after the gift and the conservation purpose furthered by the gift.

Out of Pocket Expenses

If you render services to a qualified organization and have unreimbursed out of pocket expenses related to those services, the following three rules apply.

  1. You must have adequate records to prove the amount of the expenses.
  2. You must get an acknowledgment from the qualified organization that contains a description of the services you provided and a statement of whether or not the organization provided you any goods and services to reimburse you for the expenses incurred. If so, the statement must include a description and good faith estimate of the value of any goods or services (other than intangible religious benefits). If the only benefit you received was an intangible religious benefit, you must receive a statement stating this; however, the acknowledgment does not need to describe or estimate the value of an intangible religious benefit.
  3. You must get the acknowledgment on or before the earlier of (a) The date you file your return for the year you make the contribution, or the due date, including extensions, for filing your return.

Car Expenses. If you claim expenses directly related to the use of your car in giving services to a qualified organization, you must keep reliable written records of your expenses. Whether your records are considered reliable depends on all the facts and circumstances. Generally, they are reliable if you made them regularly and at the time you incurred the expense.

Your records must show the name of the organization you were serving and the date each time you used your car for a charitable purpose. If you use the standard mileage rate of 14 cents a mile for 2016, your records must show the miles you drove. If you use actual expenses to complete the deduction, your records must show the costs of operating the car for charitable purposes only.

There are a number of tax vehicles for turning charitable desires into tax deductions. While these techniques are quite complex, they can with the proper guidance provide substantial tax deductions. This Financial Guide provides an introductory view of the ways to maximize your tax deduction while satisfying your charitable goals.

When an organization claims to be tax-exempt, it does not necessarily mean that contributions are deductible. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

The well-known mainstream charities generally provide deductibility for donations. But, surprisingly, some well-known organizations do not. If deductibility is a factor in your decision to make a contribution to a tax-exempt organization, especially if the amount is substantial, you might want to determine whether the organization qualifies for deductibility. IRS Publication 78, the Cumulative List of Organizations, is an annual list of those charities eligible for deductibility. You can also call the IRS (800-829-1040) about the deductibility of a contribution if you’re in doubt.

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location. These three publicly available documents are:

  • Form 1023: the application filed by the charity to obtain tax-exempt status.
  • IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
  • Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity’s income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity’s five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

Tip: The charity registration office in your state (usually a division of the state attorney general’s office) may also have a copy of the charity’s latest Form 990, along with other publicly available information on charities soliciting in your state.

Even though the charity qualifies for deductibility, taxpayers are often disappointed to learn that their expected deductions are not allowed. Here are some of the common misconceptions about the deductibility of charitable contributions:

  • If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted. An exception allows you to deduct the full amount if what you get in return is insubstantial in value (e.g., 2 percent of the value of your contribution) and the charity tells you the deductible amount.
  • Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
  • It’s a mistake to believe you can deduct estimated cash contributions. This was widely done though IRS required you to make a record of some kind at or around the time of the gift. But cash contributions in 2007 and after aren’t deductible at all unless substantiated by a receipt from the charity, a canceled check, a credit card statement or other supporting documentation from the charity.
  • No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
  • Since contributions must be made to qualified organizations to be tax-deductible, donations made directly to needy individuals are not deductible.

Note: The amount of the deduction you can get for the garden-variety charitable contribution (we’ll talk about more sophisticated techniques in a moment) depends on the type of charity and the type of contribution, as well as on the specific tax situation of the donor (since there are percentage-of-income limitations). For these reasons, tax planning for charitable contributions requires the assistance of your tax advisor.

Planned or Deferred Giving

There are a number of sophisticated techniques for giving money to a charity that differ substantially from the usual method of just writing a check. You’ve probably been approached by a number of charitable organizations suggesting ways you can save tax dollars through the use of planned or deferred giving techniques. Indeed, much of the revenue of many charities comes from the use of such techniques. However, not all charities have the resources to be able to offer sophisticated arrangements. Briefly stated, these various techniques, discussed below, work as follows:

A planned or deferred gift is a present commitment to make a gift in the future, either during your lifetime or pursuant to your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it certain tax benefits. Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but also might offer a current income tax deduction. If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale – all the while helping a charity.

Tip: Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, business interests, real estate, retirement plan) and its appreciated value. Professional guidance is even more important here than in the garden-variety type of contribution program because these of the complexity of these gifts.

Types of Planned and Deferred Gifts

There are several types of planned and deferred gifts: (1) life insurance, (2) charitable remainder annuity trust, (3) charitable remainder unitrust, (4) charitable lead annuity trust, (5) charitable lead unitrust, (6) charitable gift annuity, (7) pooled income fund. These are discussed briefly below:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Annuity Trust

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust’s termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Remainder Unitrust

This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Annuity Trust

You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Lead Unitrust

This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the charities.

Here, too, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Should You Make a Planned or Deferred Gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization. Keep in mind that despite the tax benefits, you will still be out-of-pocket after the deduction.

Some questions you should consider are:

  • Does the gift fit into your estate and family plan?
  • Is the charity viable, reputable, creditable, and reliable?
  • Do you wish to support its programs?

Government and Non-Profit Agencies

  • Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
  • Contact the appropriate state government agency to verify a charity’s registration and to obtain financial information on a soliciting charity.
  • Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

By knowing the many ways that charities are regulated, both by the states and the IRS, you can better protect yourself against fraudulent charities and know that your charitable contribution will be properly used for the intended purpose. And if you do fall prey, you should know how to complain most effectively.

Giving to a charity is a worthy objective. However, for you and society to get the maximum benefit from your contribution, you need to give wisely and make sure that your contribution serves the intended purpose.

If you aren’t completely knowledgeable about your intended charities, you should review their operations and practices before giving. Even if the charity is a household name, its practices may be wasteful. For example, a major part of its receipts from contributors may be used not for charitable purposes but to pay an outside fundraiser.

Unfortunately, many charities go beyond wasteful practices and are outright frauds. This Financial Guide will discuss how the various states and the IRS regulate charities to minimize the abuses in this area and explains how to files a complaint against a phony charity.

How the States Regulate Charities

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State). State government agencies do not approve charities. However, they do require charities to follow certain regulations.

Most states have registration and licensing rules requiring charities to file certain basic information, such as the official name, principal address, and purpose of the organization. This requirement generally applies to most charities, whether national or local, that solicit in the state.

Annual reporting is also a common state requirement and generally involves the filing of the charity’s financial statements. In many cases, a copy of the charity’s federal tax return (IRS Form 990) is accepted by the state as fulfilling its annual reporting requirements.

Planning Aid: For more information on general businesses and their practices, see Better Business Bureau.

Note: Churches and other religious organizations, as well as small charities that receive contributions below certain levels, are frequently exempt from state registration and annual reporting requirements.

Some states have specific regulations for professional fund-raisers used by charities. They may require the fund-raiser to register with the state and put up a bond ranging from $2,500 to $50,000 to reimburse the state for any fines and/or penalties imposed on the fundraiser.

Tip: Contact the appropriate state government agency to verify a charity’s registration and to obtain financial information on a soliciting charity.

How the IRS Regulates Charities

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes. The IRS looks at these documents in terms of whether they meet the Code’s requirements; it does not judge charities’ worthiness.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition. When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a Determination Letter formally notifying it of its charitable status. Older charities may have a 101(6) ruling, which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual income do not have to apply to the IRS for exemption.

Tip: IRS Publication 78, the “Cumulative List of Organizations,” is an annual list of tax-exempt organization eligible to receive deductible contributions. Visit the IRS website for more information.

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location. These three publicly available documents are:

  • Form 1023: the application filed by the charity to obtain tax-exempt status.
  • IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
  • Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity’s income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity’s five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general’s office) may also have a copy of the charity’s latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity’s application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. Although the charity is not required to provide photocopies of the return, it must have a copy on hand for public inspection.

How to File a Complaint

Complaints about charities are uncommon. However, if sweepstakes prizes, membership benefits, the charity’s magazine, or ordered merchandise is not received, donors may need to file complaints. Donors may also be concerned about duplicate mailings from the same charity or may wish to remove their names from the charity’s mailing list.

Here is how to file a complaint:

  1. Put your complaint in writing. Clearly explain the problem and what specific action you want taken by the charity to resolve it.
  2. Include copies of all applicable documents with your complaint (for example, copies of canceled checks for merchandise ordered, copies of mailing labels in case of duplicate mailings, or copies of problem appeals).
  3. File your complaint with the Better Business Bureau online or by mail: BBB Wise Giving Alliance, 4200 Wilson Blvd., Suite 800, Arlington, VA 22203. Complaints can also be filed with government agencies, such as your state attorney general’s office. Many states have consumer protection agencies and special offices to regulate charities.
  4. If your complaint involves activities, not in accordance with the organization’s tax-exempt purposes (for example, misappropriation of funds) contact the IRS, as well as your state attorney general’s office. In addition, the U.S. Postal Inspection Service investigates charges of false representation and violations of the mail fraud statutes.

Government and Non-Profit Agencies

  • Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
  • Contact the appropriate state government agency to verify a charity’s registration and to obtain financial information on a soliciting charity.
  • Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

Frequently Asked Questions

How can I spot a charity scam?

These are some common-sense suggestions for avoiding rip-offs:

  • Try to avoid making a cash contribution. If possible make your donation using a check or money order made out to the charity-never to the individual soliciting the donation. If you do pay cash always get a receipt. Cash donations are not tax deductible without a receipt.
  • Ask for written descriptions of the charity’s programs and/or finances.
  • Don’t allow yourself to be pressured to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.

    Tip: Don’t forget to keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.

  • Don’t be misled by a charity that resembles or mimics the name of a well-known organization–all charities should be checked out.

Before giving, check on all charities with the local charity registration office (usually a division of the state attorney’s general office) and with the Better Business Bureau (BBB).

What should I watch out for with mail solicitations?

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

  • The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal brings tears to your eyes but tells you nothing about the charity’s functions, check it out carefully before responding.
  • Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.

    Note: Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.

  • It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
  • Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal as a lottery operated by mail.
  • Appeals that include surveys should not imply that you are obligated to return the survey.

What should I watch out for with door-to-door solicitations?

When you are approached for a contribution of time or money, ask questions — and don’t give until you’re satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

  • Ask for the charity’s full name and address. Demand identification from the solicitor.
  • Ask if the contribution is tax-deductible. Contributions to tax-exempt organizations are not always tax-deductible.
  • Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.

    Tip: Registration, by itself, does not mean that the state or local government endorses the charity.

  • Don’t give in to pressure to make an immediate donation or allow a “runner” to pick up a contribution.
  • Statements such as “all proceeds will go to charity” may mean money left after expense– such as the cost of fund-raising efforts– will go to the charity. These expenses can be big ones, so check carefully.
  • When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity’s share will be. Sometimes the organization will receive less than 20 percent of the amount you pay.

If a fundraiser uses pressure tactics– intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

How can I maximize my tax benefit from charitable contributions?

Many donors are not aware that their contributions may not be deductible, or that deductions may be limited. Here are the general rules:

When an organization claims to be tax-exempt, it does not necessarily mean contributions are deductible. “Tax-exempt” means that the organization does not have to pay federal income taxes while “tax-deductible” means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these are eligible to receive contributions deductible as charitable donations.

Tip: When in doubt, call us or the IRS (800-829-1040) about the deductibility of a contribution.

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible.

Example: You pay $50 for a charity luncheon worth $30. Only $20 can be deducted.

Donations made directly to needy individuals are not deductible. Contributions must be made to qualified organizations to be tax-deductible.

Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible they are paid.

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.

For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.

What are the most tax-effective ways of donating?

There are many ways to give money to charity. In fact, much of many charities’ revenues come from the “planned or deferred giving” techniques. A planned or deferred gift is a present commitment to make a gift in the future, either during your life or via your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it tax benefits.

Charitable gifts by will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but might also offer a current income tax deduction.

If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale — all the while helping a charity.

Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, real estate, retirement plan) and its appreciated value. Not all charities have the resources to be able to offer more sophisticated arrangements.

Tip: These gifts are complex, so be sure to consult with both the charity and your financial advisor to determine how to best structure your deferred gift.

Here are some examples of planned and deferred charitable gifts:

Life insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Annuity

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or to your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust’s termination — even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Remainder Unitrust

This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Annuity Trust

You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Lead Unitrust

This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the charities.

Here, too, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity.

You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Should I make a planned or deferred gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization; despite the tax benefits, you will still be “out-of-pocket” after the deduction.

Some questions you should consider are:

  • Is the charity viable, reputable, creditable, and reliable?
  • Do you wish to support its programs?
  • Does the gift fit into your estate and family plan?

Is it wise to give my time to charity?

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself.

First, make sure you are familiar with the charity’s activities. Ask for written information about the charity’s programs and finances.

Be aware that volunteer work may require special training devotion of a scheduled number of hours each week to the charity.

If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Tip: Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

How do charity thrift stores work?

There are three major types of thrift store operations:

  • Conduit-type shops are run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
  • The second category of thrift operations is represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of “rehabilitation through employment.”
  • The third category involves charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store, or, (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed store(s) for an agreed-upon amount.

Tip: The “fair market value” of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the “going rate” for comparable items. If you are donating directly to a “for-profit” thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Tip: Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

Tip: If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party, an independently managed thrift store, ask what the charity’s share will be.

Tip: Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross, or a flat fee per bag of goods collected.

How are tickets to charitable events treated?

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

  • Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
  • Remember, your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the “fair market value” of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.

    Tip: If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

    Tip: Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.

  • Watch out for statements such as “all proceeds will go to the charity.” This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20 percent or less of the price paid.

    Tip: Ask the charity what anticipated portion of the purchase price will benefit the organization.

  • Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

How can I find out if contributions to a particular charity are tax-deductible?

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition.

When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a “Determination Letter” formally notifying it of its charitable status. Older charities may have a “101(6) ruling,” which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual gross receipts (subject to the Gross Receipts test) do not have to apply to the IRS for exemption.

What information can I obtain from the IRS about a charity?

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location.

These three publicly available documents are:

  • Form 1023 – the application filed by the charity to obtain tax-exempt status.
  • IRS Letter of Determination – the two-page IRS letter that notifies the organization of its tax-exempt status.
  • Form 990 – the financial/income tax form filed with the IRS annually by the charity. Charities with a gross income of less than $25,000 and churches are not required to file this form. Among other things, Form 990 includes information on the charity’s income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity’s five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Form 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general’s office) may also have a copy of the charity’s latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity’s application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. The charity is not required to provide photocopies of the return but must have a copy on hand for public inspection.

What types of deductible contributions can be made to charity?

Generally, you can donate money or property to charity. A deduction is usually available for the fair market value of the money or property. However, for certain property the deduction is limited to your cost basis; inventory (some exceptions), certain creative works, stocks held short term and certain business-use property. You can also donate your services to charity, however, you may not deduct the value of your services. You can deduct your travel expenses and some out of pocket expenses.

What types of organizations generally qualify for a charitable deduction?

The following types of organizations generally qualify for a deduction. Before making a donation, make sure to verify the organization’s status. You can do this by asking for evidence in writing or contacting the Internal Revenue Service.

  • Churches, synagogues, temples, mosques, and other religious organizations.
  • Federal, state and local governments if the proceeds are used for public purposes.
  • Nonprofit schools, hospitals and volunteer fire companies.
  • Public parks and recreation facilities.
  • Salvation Army, United Way, Red Cross, Goodwill, Boy Scouts and Girl Scouts.
  • War veterans’ groups.

What types of organizations generally do not qualify for a charitable deduction?

The following types of organizations generally do not qualify for a charitable deduction:

  • Social and sports clubs.
  • For-profit organizations.
  • Lottery, bingo or raffle tickets.
  • Dues to social or recreational clubs.
  • Homeowners’ associations.
  • Individuals.
  • Political organizations.

What is the limit on the deductibility of charitable contributions?

The amount of your deduction for charitable contributions is limited to 50 percent of your adjusted gross income and may be limited to 20 or 30 percent of your adjusted gross income, depending on the type of property you give and the type of organization you give it to. Before you make a donation, verify with your tax advisor which limit applies.

Can I deduct contributions to tax-exempt organizations?

Not necessarily. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. There are more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

What should I look out for in my charitable giving?

Not everything the charity gets from you qualifies for deduction:

  • If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted.
  • Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
  • No cash or non-cash donation is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
  • Since contributions must be made to qualified organizations to be tax-deductible, donations made to needy individuals are not deductible.

Is federal gift or estate tax due on my charitable gift?

Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), along with the current income tax deduction.

Some charities talk about planned or deferred giving. What is that?

Usually they are ways whereby both you (or your family) and charity enjoy your property or its income. The most popular are:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Trust

You transfer assets to a trust that pays an amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust’s termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Trust

You transfer assets to a trust that pays an amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You keep the ability to pass on most of your assets to your heirs. Unlike the charitable remainder trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

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