When it comes to supporting charitable organizations, Americans are an extremely generous people. In recent years, Americans have donated nearly $375 billion to charities annually—the majority of which came directly from individuals1.
If you are among those who regularly donate money to charity, it’s in your best interests, as well as the charitable causes you care about, to confirm whether your dollars are being spent wisely and making the promised impact. If you are also hoping to deduct your charitable donations on your tax return, you’ll need to confirm whether the IRS recognizes the organizations you support as qualified public charities.
Is the organization a certified 501(c)(3)?
By far the most common nonprofit organizations are those that have qualified for federal tax exemption under Internal Revenue Code (IRC) section 501(c)(3). In fact, today there are approximately 1.8 million 501(c)(3) nonprofits operating in the U.S.
IRC section 501(c)(3) nonprofits can be organized as a public charity, a private foundation, or a private operating foundation. The vast majority are organized as public charities and typically pursue educational, religious, scientific, literary, or environmental missions, among many other causes.
As explained on the IRS’ website2, in order to qualify as a 501(c)(3) tax-exempt organization, a nonprofit:
- Must be organized and operated exclusively for exempt purposes as set forth in section 501(c)(3) of the Internal Revenue Code.
- Cannot be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests.
- May not attempt to influence legislation as a substantial part of its activities and may not participate in any campaign activity for or against political candidates.
To help ensure proper oversight, most 501(c)(3) nonprofits are supervised by an independent board of directors. In many cases, the nonprofit’s executive director reports to the board of directors, which ensures that no single person has control of the organization’s finances. The IRS requires most nonprofits to file an annual informational return, called IRS Form 990, to maintain their tax-exempt status.
Many Americans enthusiastically support local and national 501(c)(3) nonprofits with their donations. In addition to the satisfaction that comes from supporting a worthy cause, many donors also derive a tax benefit. That’s because the federal government has established a variety of tax incentives to encourage charitable giving. These incentives may help reduce your income tax, capital gains tax, gift tax, and/or estate taxes.
Income tax benefits
Donations made to an IRS-qualified 501(c)(3) nonprofit are tax deductible, assuming you itemize deductions on your federal tax return (most states also apply these deductions to state income tax). Although charitable contributions are 100% deductible, there are limitations on what you can deduct against your Adjusted Gross Income (AGI) in a given year.
While direct donations to a 501(c)(3) nonprofit may be tax-deductible, donations that cover the cost of attending a charity event may only be partially deductible. The money you donate to attend an event is deductible only to the extent that it exceeds the value of running the event. For example, let’s say you pay $150 to play in a charity golf tournament. If the cost of the greens fees and lunch totaled $100, you could claim only a $50 charitable donation ($150 minus $100 = $50). Charities are required to provide you with a statement that discloses goods or services provided in exchange for a donation of more than $75.
Before donating to a charity, you may first want to determine if it is classified as a 501(c)(3) nonprofit in good standing with the IRS. In some cases, a 501(c)(3) nonprofit may have had its tax-exempt status revoked for failure to file IRS Form 990 for three consecutive years. You may want to ask charities to send you a copy of the IRS Letter that certified their tax-exempt status.
You can also deduct donations to a variety of organizations that are not 501(c)(3) nonprofits. This includes3:
- A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes
- A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals
- A church, synagogue, or other religious organization
- A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions
- A nonprofit volunteer fire company
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services)
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
To determine if you can make a tax-deductible charitable gift to an organization, access the IRS’ Exempt Organizations Select Check tool at https://apps.irs.gov/app/eos.
You may also want to perform additional research before making contributions to a nonprofit to ensure the organization is managing its financial resources wisely. The following publications may contain valuable information:
- Annual reports — These reports provide an overview of an organization’s mission, programs, and impact. Reports typically include a summary of recent accomplishments, as well as financial details, charts, graphs, and other relevant data.
- IRS Form 990 — Most nonprofits with annual gross receipts of $25,000 or more are required to file Form 990. This document provides details about the organization’s governance and financials, including compensation levels for senior employees.
- Financial statements (audited or unaudited) — Some nonprofits subject their financial statements to an auditor’s outside review, while others may provide unaudited financial statements. In either case, you can learn a lot about how a nonprofit manages its donations by reviewing financial statements.
To explore charitable organizations and perform additional due diligence, access these online resources:
- Charity Navigator: Thousands of charities are rated on a numbers-based system by a team of analysts.
- Give.org: The website of the Better Business Bureau’s Wise Giving Alliance produces reports about national charities.
- GuideStar: Easily compare charities and gain access to their financial information. If the organization does not have a website, this is another place you can look to learn about its mission.