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IRS Issues Guidance on Payroll Deduction Contributions to Charities

(Dec. 11, 2006) The Internal Revenue Service (IRS) has announced new guidelines on how taxpayers can substantiate their contributions to charities made through payroll deductions.

Changes in the recently signed Pension Protection Act of 2006 included a prohibition on charitable deductions for contributions of cash, check or other monetary gift unless the taxpayer maintains a bank record or a written communication from the donee showing the name of the donor organization and the date and amount of the contribution.

For charitable contributions made via payroll deductions, the IRA is requiring two documents to substantiate the gift and satisfy this requirement:

  1. a pay stub, Form W-2 or other document furnished by the employer that sets forth the amount withheld from the taxpayer during a taxable year by the employer for the purpose of contributing to a charity
  2. a pledge card or other document prepared by or at the direction of the charity that shows the name of the charity

Donors who give to local United Ways or other organizations that funnel contributions to other charities need to only obtain the pledge card or other document from the United Way and not the organization(s) that ultimately received the money.

Contributions Greater Than $250

In addition, tax law requires that for any contribution of $250 or more, the taxpayer must substantiate the contribution by a contemporaneous written acknowledgement of the contribution by the charity. The acknowledgement must contain:

  • the amount of cash and a description of any property other than cash contributed
  • a statement of whether or not the charity provided any goods or services in exchange for the contribution
  • a description and good faith estimate of the value of any goods or services provided in exchanged for the gifts, or if the goods or services consist solely of intangible religious benefits, or a statement to that effect

However, fundraisers and donors also should be aware that for payroll deductions, the contribution amount withheld from each payment of wages to a taxpayer is treated as a separate contribution for purposes of the $250 threshold. Thus, a taxpayer who gave $300 over the course of a year through payroll deductions would not trigger the $250 substantiation requirement.

The new notice issued by the IRS is official, but temporary. The agency is expected to issue revised regulations in 2007, but the information above can and should be used until those regulations are effective.

The official notice is available on the IRS website.

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