Tax-deductible, tax-exempt, and need-to-know nuances

As year-end approaches, your thoughts might naturally turn to charitable giving—both as a way to support favorite causes and to make the most of available tax benefits. Recent changes in tax laws have prompted many people to reflect on their understanding of the rules for deductibility, starting with a fundamental question: what the IRS considers deductible—and what falls outside that category.

Here’s a quick three-point refresher:

1. In general, contributions are eligible for the most favorable tax deduction when they are made to organizations that have received tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. So-called “public charities” with 501(c)(3) status must operate exclusively for charitable, educational, religious, scientific, or similar purposes. Gifts to these organizations are eligible for a deduction if you itemize deductions on your income tax return.

   
   

2. Beyond 501(c)(3) public charities, other types of organizations do important community work but are not eligible to receive tax-deductible contributions. Civic groups, social welfare organizations, and neighborhood associations—while vital to the community—are usually classified under different IRS categories, such as Section 501(c)(4) or 501(c)(6). Gifts to these organizations are typically not deductible, even though the organizations serve valuable purposes.

   
   

3. It’s also important to keep in mind that “nonprofit” and “tax-exempt” do not always mean the same thing. Nonprofit status is a matter of state law, while federal tax-exempt status requires specific IRS approval. “Tax-exempt” means that the organization itself does not pay taxes. Only a subset of tax-exempt nonprofits qualify as “charitable” and are eligible to receive deductible contributions.

Sounds complicated, right? It is! The good news is that the Kitsap Community Foundation is here to help. Our team works with community organizations every day and can help you confirm which gifts are eligible for a deduction and which are not. More importantly, we can help you ensure that your support—whether or not it qualifies for a deduction—has the greatest possible impact in the areas you care about most.

At the end of the day, while the tax deduction can be an added bonus, what matters most is the good your generosity accomplishes. As you plan your year-end giving, please reach out to our team at Kitsap Community Foundation. We’re here to help you give confidently, wisely, and in a way that makes a lasting difference in the community you love.