Donations to 501 (c)(3) nonprofits are tax deductible

Donations to 501(c)(3) nonprofits are tax deductible. Under the IRS code section 170, when you make a donation to an organization that has been designated as a 501(c)(3) by the IRS, you are eligible to receive a tax deduction on your tax return. The deduction is reported under Itemized Deduction and will be claimed on the Schedule A.

You can donate cash or noncash properties in order to claim a deduction. Two common noncash properties are stocks and crypro currency. When you donate a noncash property to the 501(c)(3) organization, the amount of deductions you can claim on your tax return depends on if you have held the property for one year before you donate. If you donate within one year after you acquire the stocks/crypto, the amount of deduction you can claim is the lessor of the Fair Market Value on the date of donation or the actual amount you paid to acquire the properties. If you donate after you own the property for one year, you can deduct a full amount of the FMV of the properties on the date of donation.

Here are a couple of examples that can help you understand how the deductions work

Example 1

You purchased 200 shares of stock at $20,000 two years ago and you would like to donate these 200 shares. On the date you make the donation, the shares are worth $24,000. In this case, you have held the stocks for more than one year, so you can claim a full deduction of $24,000 on the Schedule A of your tax return. Meanwhile, since you donate the stocks, you don’t have to pay taxes on the long-term capital gains which is $4,000 in this case. Assuming the long-term capital gain tax rate applicable to you is 20% based on your taxable income, by making the donation, you can avoid paying tax of $800 and get an additional $24,000 tax deductions when you file the tax return. Assuming your effective tax rate is 30%, you can get a tax savings of $7,200 from the deduction. Your total tax savings from this donation is $8,000.

Have you held the property for one year?	No
Acquisition costs of these shares	$20,000
FMV on the date of donation	$24,000
Amount of deduction you can take	$24,000
Tax savings in the capital gains	$800 [20% *(24,000-20,000)]
Tax savings in the deductions	$7,200 (30% *24,000)
Total tax savings from the donation	$8,000 ($7,200+800)

Example 2

You purchased 200 shares of stock at $20,000 six months ago and you would like to donate these 200 shares. On the date you make the donation, the shares are worth $24,000. In this case, you have held the stocks for less than one year, so you can only claim a deduction of $20,000 on the Schedule A of your tax return. Meanwhile, since you donate the stocks, you don’t have to pay taxes on the short-term capital gains which is $4,000 in this case. Assuming you are in the 37% tax bracket, by making the donation, you can avoid paying tax of $1,480 and get an additional $20,000 tax deductions when you file the tax return. Assuming your effective tax rate is 30%, you can get a tax savings of $6,000 from the deduction. The total tax savings you can get from the donation is $7,480.

Have you held the property for one year?	No
Acquisition costs of these shares	$20,000
FMV on the date of donation	$24,000
Amount of deduction you can take	$24,000
Tax savings in the capital gains	$1,480 [37% *(24,000-20,000)]
Tax savings in the deductions	$6,000 (30% * 20,000)
Total tax savings from the donation	$7,480 ($6,000+800)

Same rules apply to crypto currency.

If you donate crypto directly to the 501(c)(3) nonprofits, not only you don’t have to pay tax on the capital gains, you can also get a full amount of deductions for what crypto is worth on the date of donation.

Verify that the organization you are donating to has been granted tax-exempt status by the IRS and is eligible to receive tax-deductible, charitable contributions. If you're not sure, ask the organization or search the IRS database https://apps.irs.gov/app/eos/

Donate the property to the organization by transferring the ownership of the properties.

The organization will send you a receipt document to acknowledge the gift.

The organization will senaKeep the receipt till the year end when you file your tax return

Claim a deduction on your Schedule A line 11 or 12

FAQ

Q: Are there any limitations on the deductions of donations on the individual tax returns?

A: You can't deduct contributions of your time or services, or any part of a contribution from which you benefit. You can only deduct up to 30% of your Adjusted Gross Income on the tax return.

Q: Can a US corporation donate to 503(c)(3) and get a tax deduction?

A: Yes, US corporations can contribute to the nonprofits and get deductions on their business tax return as well. A corporation’s charitable contribution deduction generally may not exceed 10 percent of its taxable income. The limit is increased to 25 percent for qualified contributions made in cash for calendar-year 2020.

Q: How would individuals outside the U.S potentially benefit from tax benefits or any incentives.

A: For example for Canadian citizens that would like to donate. If the foreign person is required to file a US tax return, he/she can deduct the donations on the tax return as well. If there is a tax treaty between the US and the foreign country, the treaty may allow you to deduct the donations on your foreign tax return. For example, the income tax treaty between the Canada and U.S. allows Candian citizens/ residents to claim a donation tax credit for donations made to eligible U.S. charities on the Canadian tax return.

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