Are donations always tax deductible?

Summary:

Not always. Even when the recipient is an organization recognized by the IRS under section 501(c)(3), the donor may not be able to deduct the gift from personal income taxes.

Putnam Barber wrote on March 20, 2004:
The most common form of tax-deductible donation is a gift of cash to an organization that has been recognized by the IRS as a public charity under section 501(c)(3) of the Internal Revenue Code or to a church (churches do not have to apply for recognition if they meet other tests the IRS defines in its publications and rules). Under limited circumstances, gifts to other sorts of organizations may be deductible; those organizations will let prospective donors know of this possibility.

If the gift is for more than $250, the donor must have a contemporaneous receipt from the recipient documenting the gift and listing any goods or services the donor may have received (for example, the value of the food at a benefit banquet). Without such a receipt, the deduction can be disallowed.

Recipient organizations often send an acknowledgement letter that also serves as this receipt. The language of these letters needs to be considered with some care as discussed below.

Gifts to nonprofits that have not been recognized, gifts of property (including used cars), and gifts that are very large in proportion to the donor's taxable income may not be fully deductible. They may not be deductible at all.

There are strong sanctions in federal law, and in most states, against suggesting to a donor (or potential donor) that a gift can be deducted when the rules do not allow a deduction. If there is any doubt about how donors should view the tax consequences of their gifts, the recipient organization should get help in researching the question fully and be prepared to advise donors to get independent advice before claiming a deduction that might be challenged in an audit.

Michael Wyland, of Sumption and Wyland (see http://www.sumptionandwyland.com) commented on this question in the Nonprofit email list (see http://www.rain.org/mailman/listinfo/nonprofit):
I take a very literal reading of the regulations that even most
nonprofit-oriented CPAs and attorneys don't share. In fact, the IRS' own
Publication 1771 mistakenly uses the "is deductible" rather than "may be
deductible" phrase when discussing donation acknowledgement letters.

The simplest answer I can give (and I'm not sure it's all that simple) is
to point to the multiple pages of limitations on deductibility of
charitable contributions listed in IRS Publication 526. The 19-page full
publication may be found at http://www.irs.gov/pub/irs-pdf/p526.pdf. By
implication, there are times when charitable contributions are not tax
deductible.

If the approach of saying "your donation may be deductible" is troublesome, try using "Your gift is deductible to the fullest extent allowed by law." That preserves the "is" language while giving you room to maneuver should a disgruntled donor come back and say that the donation wasn't really deductible after all.

The bottom line is, don't put yourself or your organization in the position
of giving legal or tax advice. Instead, focus on giving donors the data
they need to determine their own tax consequences or to inform their own
legal & tax counsel.

One further note from Putnam Barber:
It is never possible for a donor to take a deduction based on doing unpaid work for an organization. Deductions can only be taken from income that has actually been received. For more on this topic, see http://www.nonprofits.org/npofaq/11/22.html