Which donations are tax-deductible depends on the country where a person or business is operating, and regulations in different nations can change over time. Generally, legitimate donations are those that do not benefit the donor, have records for verification and hold a set fair market value. Charitable donations to churches, synagogues, temples and other religious entities typically can be written off, as can those made to nonprofit hospitals, schools, public parks, veteran organizations and similar groups. People can deduct government donations, as well, as long as the gifts are intended to be used for a public purpose.
Deductions Around the World
Specific regulations regarding the amounts of allowable deductions and types of charitable organizations vary from country to country. No central database exists that shows the regulation of each nation, so if an individual wants to know what is possible for different countries, he must look up the current information specific to those regions. Many governments present information about how to handle donations on the website of the organization that processes taxes. Comparing the information from these sites is challenging due to tax system differences, even when the data is available.
Tax codes are not necessarily static. Based on the needs of a government or the views of people in a country, legislators can choose to modify the tax regulations, including sections of the tax codes related to donations. These changes do tend to happen slowly over time, but they occur frequently enough that it is not a good idea to assume that the regulations for the previous year still apply for the current year’s taxes. Codes can be confusing, so someone who made a significant number of donations that he plans to deduct may want to consult a tax professional.
Benefit to Donor
In general, tax deductible donations must be given voluntarily and cannot provide a material benefit to the donor. A donation given in exchange for something else, such as raffle tickets, memberships or merchandise, for example, would benefit the giver, so an individual could not deduct it. If the amount of the donation was more than the value of the merchandise or service received, however, a portion of the donation could still be written off.
Fair Market Value
Typically, governments look at the fair market value of the items donated to determine the amount a person can deduct. Fair market value refers to how much someone currently is willing to pay to get the item from a seller, assuming that both the seller and buyer are well informed. This amount matters because governments often only allow deductions up to a certain percentage of the company or individual’s income, and those filing their taxes have to be able to determine whether they have reached the deduction cap.
A general rule of thumb with any tax issue is that a person or company needs to be able to prove that the statements and figures listed on the tax forms are true or accurate. This requires the business or individual to keep documentation related to the donation, such as a simple receipt. If an agency or person cannot produce this documentation, the item might not be deductible.
Tax-Exempt Status in the US
In the United States, only donations given to tax-exempt organizations are tax deductible, although this status is not enough to signal deductibility. To determine if donations to an organization can be written off, a person must look to the Internal Revenue Service (IRS).
Donations to Internal Revenue Code 501(c)(3) organizations are usually tax deductible. These groups include public charities, private foundations and private operating foundations. In such cases, a person is allowed to deduct donations that amount to 50% or less of his adjusted gross income.
With private foundations, an individual typically can deduct donations that equal 30% or less of his adjusted gross income. When corporations make donations, they are subject to different rules. A corporation may deduct total donations equaling 10% or less of its taxable income, regardless of the receiving organization's foundation status.
Contributions to 501(c)(4) organizations are typically not deductible because they are not considered charitable donations. The IRS does consider such donations as business expenses, however, so companies can deduct these payments along with other eligible business expenses. 501(c)(4) organizations include those that focus on social welfare tasks, as well as those that concentrate on lobbying to legislative entities.
Charitable donations to 501(c)(6) organizations typically cannot be written off. A company may deduct them as business expenses if they are necessary for running the business, however. Organizations that fall into this group include chambers of commerce, trade associations and similar entities.
Donations made to tax-exempt organizations outside the United States typically cannot be deducted, although there are some exceptions. Donations to certain organizations in Canada, Israel and Mexico may be deductible, for example. It's best for a donor to talk to the IRS or a tax professional to verify which organizations are included in this group.