While some may argue that the benefit of giving to charity is the knowledge that you helped support a worthy organization and contributed to making a positive change in the world, many charitable organizations nonprofits still offer something in return for a donation.
The average household is full of T-shirts, tote bags, umbrellas, magnets and other paraphernalia indicating that someone in the home supported a certain cause at some point.
While collecting swag can be fun — and let’s face it, you really did want that entire collection of Masterpiece Theatre episodes that the local public television station was giving away to donors — it can also dilute the power of your donation, at least when it comes to tax time.
Tax deductions are the number one reason that people make charitable donations of money and property. What many donors fail to recognize, though, is that they may not always be entitled to deduct the entire value of what they donated.
But It’s Just a T-Shirt!
When it comes to charitable donations, IRS rules are very clear: “If you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the amount of your contribution that is more than the value of the benefit you receive.” In other words, if you receive something from the organization in exchange for your donation, you need to deduct the value of that gift from the amount of your donation.
For example, say you donate $50 to the local animal shelter, and the shelter gives you a T-shirt to say “thank you.” If the value of the shirt is $10 — and organizations are required to inform donors of the value of any gift — then for tax purposes, your donation is only considered to be $40. This rule also applies when you purchase tickets to a charity event.
A local organization may be hosting a ball to raise money for heart disease awareness and charging $75 per person. The event includes dinner and dancing. When calculating your contribution for your taxes, you need to deduct the fair market value of the dinner from your donation. Again, the organizers are required to tell attendees how much of their ticket price is deductible, and provide an estimate of the fair market value of any benefit received.
In most cases, deducting the value of a gift doesn’t impact your overall tax deductible contributions that much — after all, tote bags are cheap. In some cases, though, it can have a significant effect on your tax deductions.
When It’s More than a Tote
You attend a silent auction to benefit your child’s school. One of the items up for grabs is a beach vacation, so you make a bid — and score your summer trip for $1,000. The problem is the vacation is worth $2,500. So while you technically donated to the school, you received something of much greater value in return, so you cannot claim the donation on your taxes at all.
In some cases, an organization will tell you up front if your donation cannot be deducted. For example, when you register to participate in a charity race or walk-a-thon and receive a T-shirt and sponsor goodie bag, the registration form will probably clearly state that you cannot deduct the entrance fee, but that any additional donations are tax deductible.
As with most IRS regulations, there are always exceptions to the rules. For example, you do not have to take into account certain membership benefits when you pay $75 or less to join an organization. In other words, if you become a member to a qualified museum, and receive free parking and admission, you do not have to deduct those benefits from the overall membership fee when calculating your deductions.
In some cases, you may be able to avoid the issue altogether by refusing any gifts or benefits offered by the charity. After all, do you really need or want another T-shirt? Keep in mind, though, that IRS rules clearly state that in the case of event tickets, there is still a benefit associated with the donation, so even if you choose not to attend the event, you must deduct the benefit from your donation. If you don’t want the hassle of calculating a benefit, consider making a separate donation to the organization instead.
Determining your actual charitable contributions for tax purposes can be tricky, and when you have a substantial number of deductions, it’s usually best to work with a licensed tax professional. That way, you ensure that you follow all of the rules and do not deduct more than you are entitled to — or worse, underestimate your contributions.