When you think about "doing good," giving to a charity is often the first thing that comes to mind. Giving is as American as swimming in the summertime, with total giving in the United States topping more than $355 billion dollars annually. That's more than 2 percent of GDP.
But what's a "501(c)(3)" anyway? You hear the term all the time, but you might not know what it is. Here are three tips to clear up the confusion.
- The first thing to remember is that giving to a charity is not the only way to do good. Doing good includes a wide range of activities, from recycling, to volunteering, to serving on boards, to donating canned goods or clothing, and much more.
- "Giving," as philanthropy defines it, is an act of doing good that involves contributing money to a charitable organization. The organization in turn uses the money to carry out its mission. But giving money to just any organization doesn't mean you're eligible for a tax deduction. To qualify for a deduction, your contribution must be to an organization that is approved under Section 501(c)(3) of the Internal Revenue Code. This means that the organization meets certain government regulations for having an altruistic purpose that doesn't drive profit for any particular individual or group of individuals.
- Some acts of giving are better described as "sharing." For example, if you contribute money to help a specific family defray medical costs, or you contribute to a scholarship fund for the children of a friend who has passed away, those contributions are not eligible for a charitable tax deduction because they do not meet the IRS's 501(c)(3) test. That doesn't mean, though, that they aren't wonderful ways to do good and share a little of what you have with another human being who needs help.
After all, the IRS doesn't define "doing good." The IRS can determine what's deductible and what's not, but the ways you do good are up to you.