We all get a feeling of satisfaction when we help a good cause, and lightening your tax burden at the same time just makes the benefits even greater. Thus, it's important to understand the tax-related ins and outs of your charitable giving before you make the gift.
Claiming donations: You have to itemize deductions on your personal tax return in order to claim deductions for charitable gifts. Donations of goods and property are valued at what the IRS considers "fair market value," or roughly the price they could be sold for. For non-cash donations over $500, you also have to file IRS form 8283 and have it signed by the donee. If the value of the donated property exceeds $5,000, you must also obtain an appraisal. The IRS requires you to keep careful records of all your donations.
Limits on deductibility: No one is saying you shouldn't give as much as you want, but as far as the IRS is concerned, there are limits as to how much you can deduct on your income tax return. Annual deductions for contributions to public charities, colleges, and religious organizations cannot exceed 50% of adjusted gross income (AGI), except that contributions of appreciated capital gain property can't exceed 30% of AGI. Contributions to veterans' groups, fraternal associations, and certain private foundations can't exceed 30% of AGI, while gifts of appreciated capital gain property can't exceed 20% of AGI. Excess contributions can be carried forward for five years.
Timing: Generally, you can only claim donations that you made during the calendar year for which you're filing. If you made a donation by check, the timing is considered the date on the check, not when it was cashed. Otherwise, your receipts for credit card and in-kind donations determine the tax year in which you can claim them.
Eligible recipients: In order to be deductible, your donations must be made to qualified tax-exempt 501( c ) (3) organizations. The kinds of organizations that don't qualify are political parties, political action committees, labor unions, for-profit schools and hospitals, and foreign governments. If you're in doubt about whether the organization is a qualified charity, ask for documentation.
When making charitable giving a part of your tax and estate planning, consider these strategies:
Strategy 1: Offsetting taxes on retirement plan withdrawals. Typically, when you make a withdrawal from a tax-advantaged retirement plan, you have to pay income taxes on the withdrawal. The bill can feel particularly burdensome to people older than 70.5 who are required to make withdrawals even when they don't need the money. However, taxpayers age 70.5 and older can make tax-free distributions, up to $100,000 per year, to a charitable organization from traditional and Roth IRAs.
Strategy 2: Offsetting Roth IRA conversion taxes. For some people, it can make sense to convert traditional IRAs, that provide their tax benefit on the front end, to Roth IRAs, that offer no income-tax deductions when you contribute, but entail no income taxes when you make withdrawals. Converting can entail a large one-time tax bill, but making a sizable charitable donation can offset part of the liability.
Strategy 3: Contribute appreciated capital gain property directly to the charitable organizations. If you donate appreciated capital gain property, such as stocks held for more than one year, your deduction equals your gift's fair market value. You do not have to pay any capital gains taxes that would have been owed if you sold the asset. For instance, assume you donate $20,000 of stock that you purchased for $5,000 to a college. Your charitable contribution deduction is $20,000, reducing your taxes by $5,600 if you're in the 28% tax bracket. You also avoid paying capital gains taxes of $2,250 on the $15,000 of appreciation. Thus, your gift saves you $7,850 in taxes, making the net cost of the $20,000 gift $12,150.
Strategy 4: Reducing the size of your estate. If you have substantial assets, charitable giving can be a very valuable method for reducing your estate and thus, estate taxes. One way to accomplish this is to designate one or more charities as beneficiaries as your will; another is to make a charity a beneficiary of a specific asset.
Please call if you'd like to discuss charitable giving in more detail.