Your Gift is Deductible – NOT!
[NOTE: This article has been updated to reflect the changes made by the Tax Cuts and Jobs Act (TCJA) of 2017 and other legislation.]
[NOTE: To our knowledge, Save Our World isn’t a real charity. We’re giving an example a fictitious name.]
You just sent in your donation check to the Save Our World charity. Save Our World is recognized by the Internal Revenue Service as a public charity under the relevant sections of the Internal Revenue Code.
The donation card you enclosed in the envelope, as well as the nice thank-you letter you’ll receive in a week or two, include the words “Your gift is tax deductible.”
What’s wrong with this picture?
Simply put, Save Our World has no way of knowing whether your gift is eligible for treatment as a charitable gift on your Federal income tax return. In fact, no charity can know for sure. Many US nonprofits make this mistake, assuming that a charitable gift is tax deductible.
Tax deductibility is dependent on the facts and circumstances of a taxpayer’s specific situation. Even when the organization is legitimate and the gift is appropriate for tax deductibility, there may be reasons why the gift can’t (or shouldn’t) be claimed by the taxpayer as a deductible expense. Here are two examples:
1) About 90% of all US tax returns are not itemized. Claiming a charitable gift deduction requires the taxpayer to file an itemized return.
[NOTE: for 2021, non-itemizers were able to take advantage of a $300 maximum annual deduction for charitable gifts ($600 for couples filing jointly). No word on what Congress may decide on this benefit for 2022 and beyond.]
2) The taxpayer may have already given gifts equal to or greater than the maximum percentage of their adjusted gross income for the year. In most cases, gifts in excess of 60% of a taxpayer’s adjusted gross income are not deductible. Admittedly, this circumstance applies to a small percentage of donors/taxpayers, but it IS an exception that invalidates the nonprofit’s guarantee.
There is another problem with nonprofits using the “is” language in discussing the deductibility of charitable gifts. No nonprofit should ever get itself into the position of appearing to offer legal or tax advice. Donors should always be encouraged to seek out independent legal and tax advice when making gifts where legal and tax considerations are present.
What should a nonprofit say about deductibility?
First, nonprofit leaders should review IRS Publication 1771 and IRS Publication 526 on charitable gifts and how to issue proper receipts for them.
Publication 1771 lists what should be included on a donation receipt:
1. name of organization
2. amount of cash contribution
3. description (but not the value) of non-cash contribution
4. statement that no goods or services were provided by the organization in return for the contribution, if that was the case
5. description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
6. statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits
(described later in this publication), if that was the case
A nonprofit might wish to add a statement about tax deductibility such as, “All or part of your gift may be tax deductible as a charitable contribution. Please check with your tax advisor.”
Typically, the deductible portion of a charitable gift is the difference of the gift amount minus the fair market value (FMV) — not cost — of any goods and services the donor received in exchange for the gift. So, a nonprofit’s tax receipt might go so far as to do the math and say, “$86 of your gift may be tax deductible as a charitable contribution…”
Some charities blur the lines by saying “Your gift is tax deductible to the extent allowed by law.” We don’t like this formulation, as it is not only ambiguous but also potentially misleading as well as harsh-sounding.
According to a national study conducted in 2000, only 3% of donors listed tax considerations as a major factor in their charitable giving decisions. Some donors verify a nonprofit’s IRS recognition as a way of verifying the nonprofit is legitimate, but that’s very different than worrying about getting a tax deduction. A nonprofit’s using clear and proper language won’t affect donors seeking to do good with their gifts.