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Charitable Gifts that Qualify as Tax Deductions

As individuals begin to finalize their year-end giving, it is important to consider the deductibility of contributions. According to IRS Publication 526, Charitable Contributions, deductible contributions must be made to a qualifying organization.  Qualified organizations include nonprofits, churches, synagogues, temples, and mosques.  Gifts to a nonqualified organization or individual are not tax deductible.

Let’s discuss three examples of gifts

Staff and Clergy Year-end Gifts

Donors may want to give a gift to staff and clergy at year-end as a token of their appreciation. To ensure deductibility for donors, one method is to include year-end gifts to staff and clergy as a budget item.  Using this method permits the church to determine amounts to give each person and allows the donor to deduct the gift as being given to a qualified organization. Giving to a specific individual is not allowed if the donor wants to receive a tax deduction.

The budgeted item may be funded from general gifts or a special offering.  If the funding comes from a special offering identified for year-end gifts to staff and clergy the church should treat this as a restricted contribution.  Any funds from the special offering that are not distributed by the end of the year should be included with restricted net assets for the same purpose in the next year (presuming a calendar year fiscal year).

Benevolence Funds

In compliance with IRS rules, the church cannot accept contributions for specific individuals or families. The church should only accept contributions to the church’s benevolence fund that are not specifically earmarked for a specific individual or family.  A best practice is to have a benevolence policy.  The policy may permit suggestions of families or persons in need, but ultimately the benevolence committee should have the final approval on who would receive assistance and how much assistance they would receive. Addressing these items in advance is ideal as this allows for intentional consideration of all relevant factors.

IRS requires the following documentation when the benevolence committee provides assistance to individuals or families:

  • A complete description of the assistance
  • The purpose for which the aid was given
  • The organization’s objective criteria for disbursing assistance under each program
  • How the recipients were selected
  • The name, address, and amount distributed to each recipient
  • Any relationship between a recipient, officers, directors, key employees, or substantial contributors to the charitable organization.

Qualified Charitable Deduction

If any of your congregants are 70½ years of age or older at the end of 2022, they may make a distribution up to $100,000 from their traditional or Roth IRA to a church or charity on or before the end of 2022. The funds must go directly from the IRA trustee payable to the church or charity to qualify for a tax-free rollover. These funds are excluded from taxable income and therefore, the donor should not receive a tax deduction for this donation.

However, there are still requirements for acknowledging the gift to your organization. Per the IRS guidance, these are the items to include in the letter:

  1. The date of the gift,
  2. The name of the IRA custodian,
  3. The amount of the gift,
  4. That the gift is a qualified charitable distribution,
  5. That no goods or services were provided in exchange for the gift, and
  6. That the charitable organization has received the gift for general purposes or a field of interest fund, that it qualifies as a public charity, and the gift is not to a supporting organization or donor advised fund.

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