Donating to a 501(c)(3): Research, verify, donate, itemize, and deduct
Now that your budget is under control and you have some excess funds, you’re thinking of donating to a charity. But how do you know which charity to support? Why are some charities called 501(c)(3)s?
Key Points
- Research and verify the organization’s 501(c)(3) status before you give.
- You’ll need to itemize your taxes to receive a tax deduction.
- Be sure to keep a record of your donation.
What is a 501(c)(3) nonprofit organization?
Section 501(c)(3) of the IRS tax code creates a federal income tax exemption for organizational activities that are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, [or] preventing cruelty to children or animals.”
The U.S. government uses exemption from federal income tax to encourage the formation and development of nonprofit organizations big and small—from your community garden or local animal shelter to the Red Cross, Salvation Army, and other large charities.
Starting a 501(c)(3)
A 501(c)(3) nonprofit designation comes with tax benefits. But establishing a 501(c)(3) is no simple task; it requires time, practical expertise, and financial resources. Here’s a rundown of 501(c)(3) nonprofit organizations and things to consider if you want to start one yourself.
The code recognizes three primary types of nonprofit organizations that may qualify for 501(c)(3) tax-exempt status:
- Private foundations—defined as organizations that primarily disburse grants to other charitable organizations and individuals, rather than directly operating charitable programs.
- Churches and religious organizations—those promoting or advancing religion.
- Charitable organizations—these focus on purposes including “relief of the poor, the distressed, or the underprivileged.”
Thinking of donating to a 501(c)(3)? Know the pros and cons
There are several pros and cons to consider before deciding if donating to a 501(c)(3) is for you.
On the plus side, the IRS provides incentives for individuals to support 501(c)(3) nonprofit organizations directly. Contributions to 501(c)(3) organizations are tax deductible, meaning that—if you itemize—you can deduct the amount of your donations to 501(c)(3) nonprofit organizations from your taxable income.
Tax benefits are the most tangible reason to support a 501(c)(3) nonprofit organization, but perhaps not the only motivation. The opportunity to support a social or charitable cause that matters to you personally may also be a major incentive.
But there are some important drawbacks to consider. Your tax benefits may be limited—the IRS places an annual cap on how much of your donation may be deducted from your taxable income. And if you don’t itemize deductions on your tax return, you won’t get a deduction for these donations.
You should also consider:
- Donating certain types of assets—like real estate or stocks—may be complex.
- Your donation cannot be reversed.
- You don’t control how your donation is used.
Donating to a 501(c)(3) organization
If you’re comfortable with all these pros and cons, then you may be wondering how to identify and donate to a worthy nonprofit organization.
1. Research and identify a nonprofit organization that interests you. What causes are you most passionate about? Where can your dollars have the most impact? Your first step is to research the universe of nonprofit organizations to select an organization to receive your donation.
2. Verify the organization’s 501(c)(3) status. Are you certain that the organization you’ve selected is a 501(c)(3) nonprofit? This is important if you want to claim a tax deduction. You can verify any organization’s status by using the tax exempt organization search tool on the IRS website.
3. Decide on the type and amount of your donation. Do you want to donate cash, or something else like food, material goods, or property? Many 501(c)(3) organizations accept a variety of donation types. If you’re donating goods or property, then you’ll need to determine the current market value of what you’re giving. If you volunteer for a charity, you can’t deduct the value of your time, but you might be able to deduct travel expenses or other costs you incur while volunteering.
Charitable giving 101 and 201
Are you trying to select a charity, learn how the tax deduction works, or avoid falling for a charity scam? Refer to the Britannica Money guide to charitable giving.
If you’re ready to take your giving to the next level, a donor-advised fund can get you a tax break up front while spreading your donations out over time. A charitable remainder trust can give you retirement income and direct your legacy to a specific charity.
4. Donate to the 501(c)(3) nonprofit organization. Whenever you feel ready, you can make your donation. If you are donating cash, you may be able to use an organization’s secure payment portal. Make sure to get a receipt for your contribution.
5. Keep a record of your donation. The donation process is now complete—but don’t throw away that receipt! Maintain detailed records of your charitable giving activities, especially if you’re donating to multiple 501(c)(3) nonprofit organizations, to avoid complications at tax time. You’ll also need to keep track of the value of anything you received when you made your donation, such as a prize from a raffle or a meal from a benefit, as you can only deduct your net donation. For example, if you attended a $250 black-tie charity dinner, your tax deduction should not include the value of that pinot grigio, chicken marsala, and slice of cheesecake.
6. Claim your donation as a tax deduction. When it’s time to file your taxes, you may be able to use your charitable donation to reduce your taxable income. If you’ve donated a large amount or don’t have much taxable income, then your tax deduction for the year may be capped or otherwise limited. And remember: You’ll need to itemize your deductions, rather than taking the standard deduction, to claim this tax benefit.
The bottom line
We all want to do our part to help make the world a better place. It might not be feasible for you to start your own charity or volunteer several hours a week, but your money can make a difference if you donate to a cause that’s important to you.
By checking to see if the charity you choose is a 501(c)(3), you’re making sure that your money is going to an organization that follows the IRS rules for establishing and maintaining a charity. And if you itemize your taxes, you can get a tax benefit while you help others.