“This gift is fully tax-deductible as allowed by law”
It is a phrase that many non-profit organizations use. So you may ask, what’s wrong with it? It seems to make sense. Your organization is registered with the IRS as a 501 (c) 3 organization. Someone has made a gift to you. So why shouldn’t it be tax-deductible? To get to that answer, one needs to understand what are the three components that must be present of a contribution to be considered for tax deductibility:
- The gift itself, only certain types of contributions can be considered for tax-deductibility.
- The organization. The organization has to be a registered exempt organization with the IRS.
- The receipt. An individual gift must be substantiated.
Here are common types of contributions that do not qualify as tax-deductible, charitable contribution
- Payment for a raffle ticket
- Payment earmarked for lobbying activities
- Payment that is earmarked for an individual, regardless of the charitable nature of the payment
- Volunteer time is not considered a gift for tax purposes.
- A gift that is conditional on a future event also does not qualify as a tax-exempt contribution.
Tax deductibility is dependent on a taxpayer’s situation. Even if a gift is made to a registered 501(c) 3 for proper qualifying purposes, there are reasons why a gift can’t (or shouldn’t) be claimed by the taxpayer as a deductible expense.
Here are two examples:
1) Claiming a charitable gift deduction requires the taxpayer to file an itemized return. Almost 2/3 of all taxpayers do not itemize.
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 50% of a taxpayer’s adjusted gross income are not deductible.
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 your nonprofit say about deductibility?
Publication 1771 lists the following things that should be included in a gift 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
So you see, an organization can ensure that contributions qualify for a gift and that the receipt letter contains the four proper elements. 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 adviser.” A nonprofit should not claim that a contribution is fully or partially deductible. Even if the organization “follows the rules” listed above, deductibility is still determined by the donor and the organization has no control over the donors deductibility status.