Tax deductible donation rules

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Just what is tax-exempt status? As the name indicates, it means organizations granted such status by the Internal Revenue Service don’t have to pay taxes on any profits.

The section of the Internal Revenue Code that governs tax-exempts is 501(c).

For the last few weeks, we’ve all heard a lot about 501(c)(4) groups, or so-called social welfare organizations. This is the category that tripped up the IRS when some of its employees decided to put Tea Party and other conservative groups seeking that tax-exempt status on a lookout list in order to more closely review their applications.

But other 501(c) nonprofits also are getting added attention right now because of the deadly tornadoes that ripped through Oklahoma earlier this month. These are public charities, designated as 501(c)(3) organizations.

The name of these subsection (3) groups also is self-explanatory. They receive the major part of their support from the public rather than from a small group of individuals. They also use the bulk of donated money to further their stated exempt-organization goals. The 501(c)(3) groups include churches, hospitals, schools and groups that provide disaster aid, such as the American Red Cross, the Salvation Army and similar organizations.

Why is it important to pay attention to the number in the last pair of tax-exempt parentheses? Aside from the political debate going on about the 501(c)(4) groups, there’s the matter of the tax deductibility of gifts to the groups.

Donations to 501(c)(4) tax-exempt groups are not deductible by the donors. But if you give a gift to an IRS-approved 501(c)(3) organization, you can deduct that gift on your taxes.

Other donation deduction rules

Determining whether a charity is approved by the IRS (the tax agency calls this being “qualified”) is the first step you need to take if you want to take tax advantage of your gift.

Then there are the other rules.

In order to claim your deduction, you must itemize. If you claim the standard deduction, you can’t deduct your gift.

When you give household goods and clothing to a charity, you can deduct the items’ fair market value, not what you paid for it. That means the $150 pair of shoes you bought last year do not equate to a $150 deduction today. If they’re worth just $25 now, then that’s the amount you can claim.

Also, any physical items you give to a qualified charity must be in good or better condition, or you cannot claim them as a deduction.

Finally, you must get a receipt for your donation, regardless of whether it consists of goods or cash (which in IRS terminology means not only currency, but also check or credit card donations).

In most cases you don’t have to send a copy of that receipt to the IRS when you file your tax return that includes the charitable deduction. But if the IRS ever questions your gift and you don’t have a receipt or other acceptable documentation of your gift (for example, a canceled check), the tax auditor can automatically disallow your charitable deduction.

So as you consider helping out the Moore, Okla., and Shawnee, Okla., tornado victims, do your donation homework. That way you’ll ensure your gift helps those who need it now and that your donation will help you when you file your tax return next year.


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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and a co-author of the e-book “Future Millionaires’ Guidebook.”