When we think of giving to charity, we often consider our largess to have a financial benefit – it’s tax-deductible. Being able to reduce your taxable income, with the help of a charitable donation, can provide a bit of a benefit to your pocketbook, even though you have given some money away.
However, before you deduct your charitable donation on your tax return, you need to make sure that a non-profit organization will really allow you a tax deduction. This is because not every donation to every non-profit is tax-deductible.
The tax code classifies non-profit organizations using different designations. When we think of non-profits, we often consider 501(c)(3) organizations. These are non-profits that cannot contribute to campaigns, or participate in elections. They aren’t supposed to intervene directly, and the lobbying these organizations do is limited. When you make a donation to these types of non-profit charities, you receive a tax deduction.
The story is different, though, when you donate to an organization that is a 501(c)(4). Types of organizations that fall into this category include social welfare organizations, civic leagues, and local employee associations. These non-profits are so designated because they aren’t supposed to turn a profit over the course of the year. However, the restrictions on political activity aren’t as stringent with these types of organizations. A 501(c)(4) non-profit can contribute to campaigns as long as campaigning isn’t the main purpose of the organization. And, of course, a 501(c)(4) can also lobby for legislation.
When you contribute to a 501(c)(4), your donation is not tax-deductible. You cannot use such a contribution to reduce your taxable income. Many seniors are surprised to find out that their annual membership contributions to the AARP, a non-profit, are not tax-deductible. This is because the AARP is a 501(c)(4) organization. It’s technically a non-profit, but when you send money, you aren’t allowed to deduct it on your taxes. There are plenty of other non-profits in the same situation, offering no tax deduction when you donate.
If you do deduct a donation to a 501(c)(4) organization, and the IRS catches the mistake, you will have to pay what you owe. Your taxes will be re-figured, and you may have to pay interest and other penalties as well. This can become expensive if you aren’t careful.
Before You Donate
If you aren’t worried about the tax deduction, and you simply want to donate to a cause or organization you consider worthy of your attention, it doesn’t matter too much whether or not the organization is a 501(c)(4) non-profit. However, if you do want a tax deduction for each charitable donation, then you need to carefully choose where you donate.
Find out if the non-profit is a 501(c)(3), and is therefore tax-exempt, or if it is a 501(c)(4), and operating under different rules. If you want the tax deduction, you need to make sure you are donating to the 501(c)(3). Otherwise, you will end up without your tax deduction, even if the organization is a non-profit.