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.
