The phrase, “This donation is tax-deductible,” can be just the thing a potential donor needs to hear. Although this isn’t the only reason they donate, it’s certainly an important factor. About 85% of all charitable contributions are made by individuals who deduct their donations.
It is important to note that their donation is not always tax deductible. Whether or not it qualifies can depend on a variety of factors: who the donation is given to, when the donation is made, the purpose of the donation and the donor’s particular tax situation.
The good news is that it is up to the donor and their tax advisor to decide whether or not a donation is tax deductible. The nonprofit is not required to report donations to the IRS. Their only responsibility is to make sure they comply with any substantiation and documentation requirements for the donations they receive.
What are the Deductible Donation Guidelines?
Each donor’s situation is unique and there is never a straightforward way of knowing that their donation will be deductible. Thus, no matter what your experience may tell you, never give a donor specific tax or legal advice for the donation you receive.
Many nonprofits use the line, “Your donation is tax deductible”. In many cases this can be true, however it is less misleading to state that your nonprofit is a Section 501(c)3 nonprofit and that their gift may qualify as a charitable deduction for federal income tax purposes. Encourage donors to consult a tax professional before declaring that their gift is deductible.
Who Should Know the Rules?
Members of your organization that are involved in fundraising efforts should have a basic understanding of charitable deduction rules. This may include your executive directors, key writers of your newsletter or other communications, board members or any volunteers who help raise funds.
How Can I Take Advantage of Tax Laws?
There may be other tax advantages to donating to your particular organization. If so, include that benefit in your emails, letters, newsletters and phone calls. This may increase donations as people realize the additional advantages of donating to your organization.
Make the basic rules available to your donors through your website in the form of an FAQ (frequently asked questions) or a direct link to the IRS rules. The IRS offers a full document called IRS Publication 526, Charitable Contributions. You can find a link to it on www.irs.gov.
How to Manage Thank you Gifts
If you invite donors to a gala, then send a fruit basket or offer a coffee mug in exchange for a donation, only a portion of their donation will be deductible. The value of the gift must be subtracted from the donation amount before being reported to the IRS. To help donors estimate the deductible portion of a donation, include a statement at the end of a thank you letter that says, “The estimated value of goods or services provided in return for your donation is $____.” This will help them know exactly how much they can deduct.
Don’t forget to remind them to keep the thank you letter as an acknowledgement of their donation. Their tax professional will thank you for it!
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