Tax-Deductible Donations

A basic characteristic of a charity or philanthropy is its nonprofit status (many organizations today prefer the term not-for-profit) -- eligibility that must be documented by the Internal Revenue Service before an organization can solicit charitable donations or gifts in the United States. Small charities or churches with annual incomes of less than $5,000 do not have to apply for tax exemption. According to the Council of Better Business Bureaus, organizations that solicit contributions and memberships generally fall into one of these tax-exempt categories:

  • Internal Revenue Code 501(c)(3) This code includes groups whose purposes are charitable, educational, religious, scientific, literary or supporting national or international amateur sports competitions, the prevention of cruelty to children or animals, and testing related to public safety. (All except the last of these are deductible on your federal income taxes.)

But just because an organization has tax-exempt status doesn't mean that your gifts will automatically be tax-deductible. For example, gifts to charities located in foreign countries are not, in most cases, deductible on U.S. federal income tax forms. Whether donations to a charity are tax-deductible is determined by its foundation status. Within these 501(c)(3) organizations, there are three basic designations:

  • Public charity - A public charity receives a sizable part of its income from the public (broadly, not just from family and friends) or the government. This is defined under IRS codes 509(a)(1) through 509(a)(4).
  • Private foundation - A private foundation gets most of its income from investments and endowments and uses that money to award grants to other groups. This falls under IRS Code 509(a).
  • Private operating foundation - A private operating foundation is a private foundation that donates most of its assets directly to the causes it represents, rather than awarding grants to other charities. This falls under IRS Code 4942(j)(3).

Individuals who give to the private charities, private operating foundations and certain private foundations are allowed to deduct donations that represent up to 50 percent of their adjusted gross income if they itemize on their federal tax returns.

If you give to private foundations, generally, you will be able to deduct up to 30 percent of your adjusted gross income. Corporations making contributions to 501(c)(3) organizations are allowed to deduct all contributions up to an amount typically equal to 10 percent of their taxable income. This applies without regard to foundation status.

  • Internal Revenue Code 501(c)(4) This classification covers organizations that lobby legislative bodies on behalf of specific causes and that work primarily in social welfare activities. This group also includes some volunteer fire departments, civic organizations and local employee associations.

Contributions to 501(c)(4) organizations are not deductible as charitable donations. (Exceptions are volunteer fire departments and similar groups collecting funds to be used for public purposes, and most veterans' organizations as covered under 501(c)(19).) Interestingly, the IRS says that donations to 501(c)(4) groups can be deducted as business expenses.

  • Internal Revenue Code 501(c)(6) This code covers trade associations and boards, chambers of commerce, real estate boards and business leagues. The IRS says that contributions to these organizations are not deductible as charitable donations on your federal taxes, but they can be deducted as a business expense if they are "ordinary and necessary" to the taxpayer's business.

Other tax-exempt organizations to which you can make tax-deductible gifts include corporations organized under Acts of Congress (Federal Reserve banks, federal credit unions), cooperative hospital associations, and cooperative service organizations of operating educational organizations.

For more information on IRS exemptions, see IRS: Tax Information for Charitable Organizations.