What’s deductible and what’s not?

As an advisor, you work with clients on financial and tax planning all year long, but fall is the time when many clients ask about tax deductions from charitable giving and tax loss harvesting. These are just two of many types of transactions that result in deductions when tax returns are filed in the spring.

Charitable giving may be especially high on the planning radar right now because of the many national fundraising initiatives that begin this time of year. You (and your clients) have probably noticed that many different types of causes are celebrated each month. October, in health-related charities alone, is National ADHD Awareness Month, National Down Syndrome Awareness Month, Pregnancy and Infant Loss Awareness Month, Spina Bifida Awareness Month, National Physical Therapy Month, and likely many more.

Make sure your clients are aware that there are specific parameters around tax deductibility before they respond to requests from organizations and their friends and family members who support these organizations. Your clients are relying on you as an advisor to stay on top of the rules, including:

• Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt - a status for which an organization must seek IRS approval.

• Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.

• There are different types of nonprofits that are recognized by the IRS as tax-exempt under Section 501(c).
  
  For example, to qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.

• Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible.

• Tax deduction around social welfare groups organized under Section 501(c)(4).
  
  Examples of social welfare groups include neighborhood associations, veteran organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veteran organizations).

If you have any questions about the tax deductibility of your clients’ contributions to various organizations, please reach out to the team at the Community Foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules.