Charitable giving is an extremely important component of our society. However, many people don’t realize that from a tax perspective, not all charities are the same, and thus not all contributions have the same tax benefits. This applies whether you desire to form a charitable organization or simply make a contribution to an existing organization.
The charitable organization that we will focus on is the public charity. An organization will be deemed a public charity if it falls within one of the following four categories:
1) The organization is one of the following six types of entities: churches; educational organizations; hospitals/medical research organizations; state colleges and universities; governmental units; and agricultural research organizations.
2) The organization receives one-third of its support in each taxable year from any combination of: gifts, grants, contributions, membership fees, gross receipts from admissions/merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business.
3) The organization supports or benefits public charities set out in categories 1 and 2 above.
4) The organization is organized and operated exclusively for testing for public safety.
The above designation as a public charity is extremely important since it will directly affect the level of tax deductibility that a donor can achieve. Specifically, contributions to such entities that qualify as public charitable organizations, can be deductible up to 50% of the donor’s adjusted gross income (AGI) for a given year. Additionally, if such contributions exceed 50% of your AGI for a year, you may be able to deduct the excess in each of the next 5 years until it is used up. However, your total charitable deduction for a year to which you carry your contributions forward cannot exceed 50% of your AGI for that year.
Alternatively, a charitable contribution made to an organization that does not qualify as a public charity will likely only be deductible up to 30% of the donor’s AGI for a given year. Therefore, when researching specific charities to which you wish to contribute, it is extremely important to ask the nature of the charity (at a base level, whether it is a public or private charity), as it will have tax-related ramifications.