How Does Tax Deduction From Giving to Charities Work in the USA?
Tax deductions are a common item that many Americans utilize when filing their income taxes for the fiscal year. One of the most commonly used deductions is the tax deduction for charitable giving. This tax deduction is highly appealing to those who utilize it because it gives us the ability to control how our tax dollars are put to work.
Money that would otherwise be given to the government and then directed to whatever area they deem necessary instead goes back to your community, and you can donate to causes that matter to you personally. Additionally, many charities rely on yearly donations to cover their operating costs, so it’s a win-win scenario for both donor and recipient.
Now, you’re probably wondering how much you have to donate to get a tax deduction.
Up to 60% of a person’s total taxable income can be deducted by giving to charity, which greatly offsets taxable income and reduces the amount owed at the end of the year. Any excess donations over this amount can also be carried over for up to five years until the threshold for a claim has been met. This gives you the ability to donate the amount you want, without having to worry about claim limitations.
Can Americans deduct donations to foreign non-profits?
The short answer to this question is no, with some exceptions. As per the Internal Revenue Service (IRS) website, donations to foreign organizations are only acceptable in two cases:
- Organizations listed in the IRS’s Tax Exempt Organization Search module. Some organizations will be listed with a foreign address, but simply operate in foreign territories despite being a domestic organization. These organizations operate under the same rules as standard domestic organizations when it comes to deductions.
- Certain organizations with addresses in Canada provided they fall under existing eligibility rules set forth for domestic organizations and qualify under the existing tax treaty with Canada. Additionally, deductions for donations for Canadian organizations are ineligible unless the person reporting the deduction has an income source in Canada.
Charitable deduction: Tax vs. part of the tax process
Charitable deductions are part of the tax process. Deductions reduce the amount of taxable income a person reports, rather than reducing the tax bill that is owed at the end of the tax process like a tax credit would do.
When filing taxes, there are two options available in regards to deductions. You can either choose to file with the standard deduction or you can use the itemized deduction method. Utilizing the itemized deduction method is required when reporting tax deductions, such as charitable donations and other eligible expenses. Otherwise, you would opt to take the standardized deduction.
Each person should weigh which will benefit them most when filing taxes, and most filing services will notify the filer if other options would be more beneficial to them.
Are all donations tax-deductible?
Again, the answer is no.
In order to be tax-deductible, an organization receiving donations must fit certain criteria according to the IRS. The charity in question must also be an eligible 501(c)(3) organization, meaning that it is exempt from tax under federal law.
Most organizations will advertise their tax-deductible eligibility when asking for donations because they know it’s a deciding factor for many large donors. When in doubt, it’s always a good idea to ask.
Which foundations qualify you for tax deductions for charitable donations
Organizations that qualify for a 501(c)(3) status include:
Churches and religious organizations covered under Section 170(c)
These entities are also exempt from federal income tax under Section 501(c)(3) of Title 26 of the United States Code. However, for a religious entity to be tax-exempt, it should be organized and operated exclusively for religious purposes and in support of the cause of preventing cruelty to children, women, or animals.
War veterans’ organizations
The Internal Revenue Code (IRC) section 501(c) includes subsections that provide tax-exemption benefits to organizations that benefit veterans of the Armed Forces. According to the IRC, these organizations’ memberships include all regular and reserve components of the uniformed services that are subject to the jurisdiction of the Secretary of the Army, the Secretary of the Air Force, the Secretary of the Navy, the Secretary of Defense, and the Coast Guard.
To be exempt, an organization must be either a post or an organization of present and past members of the Armed Forces; an auxiliary unit of such groups; or a foundation or trust for such groups.
According to the IRC, a fraternal beneficiary society, order, or association is tax-exempt if it meets the following requirements:
- It has a fraternal purpose, which means that its membership should be based on a common tie or pursuit of a common goal. Of course, it should also have a substantial program of fraternal activities.
- It operates under the lodge system. Or, it should function for the exclusive benefit of its members themselves operating under the lodge system.
- To operate under this system, an organization is required to have a minimum of two active entities, which are the parent organization and the subordinate organization, sometimes called a lodge or branch. Though the lodge can be self-governing, it should still be chartered by the parent organization.
- It should be able to provide for the sickness, accident, and life payments to its members or their dependents. However, a fraternal society that only provides benefits to some (not all) of its members may still qualify for an exemption, given that most of its members are eligible for benefits. Also, it should provide a reasonable criterion for excluding certain members.
These are endowment funds pooled from a community for the purpose of charitable giving. You may know these by other names, such as:
- Community trusts
- Community foundations
- United way organizations
Volunteer fire companies
A volunteer fire company may be considered as a social welfare organization and tax-exempt if its members are actively engaged in fire fighting and similar activities that are done to assist victims of disasters.
However, even if the organization does not have an independent social purpose, such as offering recreational facilities for its members, it may still be considered as exempt under section 501(c)(3).
Private foundations making charitable contributions to public charities
Like charities, private foundations are also established for charitable purposes. However, they must comply with IRS rules, ensure that they are active, and their funds benefit the public to be given the 501(c)(3) status.
Tax-exempt educational organizations
The IRC 501(c)(3) also exempts some institutes from federal income tax if they are organized and operated for educational purposes in a charitable manner. These include daycare centers that cater to low-income families, hobby clubs, repertory theaters, and research organizations among others.
Boy Scouts and Girl Scouts of America
With a stated mission to prepare young people to make moral and ethical choices in their lives based on the Scout Oath and Law, the Boy Scouts and Girls Scouts of America teach their members responsible citizenship and self-reliance by letting them participate in a wide array of educational programs, outdoor activities, and career-oriented programs in partnership with community organizations.
The Boys Scouts of America is chartered by the National Council, which is incorporated as a 501(c)(3) non-profit organization and is funded through private donations, corporate sponsorships, membership dues, and fundraising through special events.
Are there limits to what you can claim as an itemized tax deduction?
Deductions must be made within the eligible tax year and can include monetary or physical donations of items such as property. Most charitable deductions can equate to up to 60% of a person’s total adjusted gross income, but there are some organizations, such as certain private foundations, veterans’ organizations, domestic fraternal societies, and non-profit cemeteries that are limited to a total deduction of 30%.
As mentioned earlier, if a deduction exceeds these limits, the individual who is filing taxes can carry over the overage to apply to the following year’s taxes for up to 5 years until they have satisfied the percentage. There is also a limit that applies to the donation of a property that is considered a long-term capital gain due to its ability to increase in value.
Remember, while there are many good charitable organizations, not all of them qualify for tax-deductible donations, so you should make sure the one you choose qualifies. You can do this by looking for the 501(c)(3) designation after its name or searching for its name on the IRS online database that lists all acceptable charities.
To start enjoying the perks of making charitable contributions, donate to Food for Life today. We need your help to make a difference for those in need all over the world!