Charitable Giving: Tax Exempt and Tax Deductible

Contributions that are "tax exempt" does not necessarily mean that they are tax deductible. "Tax exempt" means the organization does not have to pay taxes. "Tax deductible" means the donor can deduct contributions to the organization on his or her federal income tax return. The Internal Revenue Code defines more than 20 different categories of tax exempt organizations; however, contributions to only a few of these categories are also tax deductible.

The most common "tax deductible" group is the 501(c)(3) category. To be classified as tax exempt under Section 501(c)(3), an organization has to file documents with the Internal Revenue Service that prove it is organized and operated for the charitable purposes specified by the Internal Revenue Code. The IRS views the documents only in terms of the code, but it does not "approve" charities or evaluate the charity's efficiency. Organizations receiving 501(c)(3) status are considered by the IRS as charitable, educational, religious, scientific, or literary; those that prevent cruelty to animals: and those that foster national or international amateur sports competitions.

When the IRS rules a charity to be in the 501(C) (3) category, contributions to the organization are tax deductible as charitable donations for federal income tax purposes. The group receives a "Letter of Determination” its status, and a copy of this letter should be available from the organization to verify its tax exempt status. (Older charities may have a 101(6) ruling, which corresponds to section 501(c)(3) of the 1954 Internal Revenue Code.)

Generally, contributions to organizations that are tax exempt under sections 501(c)(4), 501(c)(6) and under other sections of the Internal Revenue Code are not deductible as charitable donations, but might be deductible as business expenses. If you are unsure about an organization's tax status or would like more information about tax exemptions and deductions, contact your local IRS office.