Charitable Deductions

In this post, I discuss qualified charitable deductions for purposes of the income and estate taxes and how they can help lower your tax bill.

*Photo by StockMonkeys.com is licensed under CC 2.0. *

Gifts to charity can play an important role in many estate plans. Therefore, it is important to understand how charitable tax deductions function and interact with both the income tax and estate tax. In this post, I will provide a brief overview of charitable deductions, in order to lay the groundwork for future posts that will provide descriptions of specific planned giving techniques.

Qualified Recipients

In order to receive a charitable deduction for both estate and income tax purposes, the gift must be to a qualified charity or organization. In general, qualified organizations include any state or federal governmental unit existing exclusively for public purposes and any domestic corporation, trust, community chest, fund, or a foundation organized and operated for any of the following purposes: 

1. Religious;
2. Charitable;
3. Scientific;
4. Literary;
5. Educational;
6. Prevention of cruelty to children or animals;
7. To foster national or international sports competition;
8. A lodge system or other domestic fraternal organizations. The organization must, however, exist specifically for one of the purposes listed above other than to foster national of international sports competition;
9. Posts or organizations for war veterans;
10. Nonprofit cemetery companies, though these gifts do not qualify for a charitable deduction for purposes of the estate tax.

Generally, donations to international charities are not deductible. Charitable contributions for use abroad generally only qualify for charitable deductions if the gifts are made to domestic charities that are not legally obligated to provide the money to foreign organizations. It is important to note, however, that gifts to domestic charitable organizations are deductible even if that charity is a foreign subsidiary.

There are, however, some exceptions to the general prohibition of charitable deductions for international charities. They may be allowable if addressed by a tax treaty, such as the tax treaties between the United States, Canada, and Mexico. There may also be an exception where property is transferred to foreign governments or charities for specific charitable purposes after the giver’s death. These gifts, however, qualify only for charitable deductions for purposes of the estate tax.

Qualified Charitable Deductions

In order for there to be an allowable deduction, the donation must be one of money or property, and whatever is donated must be put beyond the dominion and control of the donor. No charitable deduction is allowed for the gift of services—though non-reimbursed expenses are deductible.

Charitable deductions are allowed for the donations of most property. While gifts of money are most commonly understood as the charitable donation of choice, stock, bonds, stock options, and real estate are also valid, deductible gifts.  Generally, the deduction amount of non-cash property equals the property’s fair market value at the time of the donation.

Return Benefits

If the donor receives a benefit for the gift, the deduction may be lowered or disallowed. If a tangible benefit is received, assuming there is a donative charitable intent, the excess of the donation over the value of the benefit received is deductible. Any amount of quid pro quo is not deductible. The charity is responsible for telling the donor the value of any benefit received.

Some return benefits, however, do not affect the value of the deduction. If the benefit is of de minimis value, it generally does not affect the deduction. In addition, intangible religious benefits will not be considered a quid pro quo.

In a future post, I will discuss some limitations of charitable deductions.

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See Also:

The Federal Estate Tax

Timing and Limitations of the Charitable Donation Deduction