Thanksgiving, Giving Tuesday and Christmas are right around the corner and that brings out a benevolent spirit in many people. For those who qualify and do some careful planning, donating to charity can also lower…
Thanksgiving, Giving Tuesday and Christmas are right around the corner and that brings out a benevolent spirit in many people. For those who qualify and do some careful planning, donating to charity can also lower their federal income tax bill. Here are a few things to know:
Contributions of cash or property made to qualified organizations can be written off as a tax deduction by certain taxpayers. They are recognized in the year given, and gifts of $250 or greater must be substantiated by a contemporaneous written receipt. Receipts produced or dated after-the-fact can be rejected by the Internal Revenue Service, and the deduction can be disallowed.
Most, but not all, charitable organizations, such as churches, veterans organizations, volunteer fire departments and other nonprofits are considered qualified organizations for tax purposes. To verify an organization is qualified for tax purposes or to find a qualified organization in your area, use the Tax Exempt Organization Search tool found on the IRS website. If you are not familiar with the organization, sites such as Guidestar.org and Charity Navigator can help you find a qualified charitable organization and evaluate it as well.
Contributions can be made in the form of cash or other property and must be appropriately valued. Non-cash contributions are generally deductible at fair market value although there are special rules for vehicles, vessels and appreciated property. Be aware that many organizations that will take donations will not value them, so that must be done by the donor. There are a number of online tools available to help, such as those from the Salvation Army and Goodwill Industries. The IRS issues guidance on determining the value of donated property in Publication 561.
Contributions are tax-deductible for taxpayers who itemize their deductions, rather than taking the standard deduction, on their federal income tax returns. With the new Tax Cuts and Jobs Act, the standard deduction is much higher than in the past — $12,000 for single filers and $24,000 for married couples — so fewer taxpayers are expected to itemize. However there are still ways to cut your tax bill by donating to charity. Read on for a few additional strategies to achieve tax savings while donating to a qualified charitable organization.
Bunching, or bundling, is where taxpayers are intentional about the timing of their deductions to create a tax break. Since expenditures like charitable contributions, medical bills and property taxes can be paid at various times of the year, consider skipping one year of activity then putting two years of activity together by making the payments in January and December. This could allow you to take the standard deduction in one year and a higher, itemized deduction in the next.
Another strategy is to donate appreciated assets like stocks, bonds and real property to charity. Since they are deductible at fair market value, taxpayers can avoid recognizing the increase in value and paying capital gains tax on the appreciation, whether they itemize or not, by donating them directly to charity.
Finally, a great strategy for those who qualify is the RMD-to-charity rollover or qualified charitable distribution. Taxpayers age 70½ and older with tax-deferred retirement accounts like IRAs must take taxable required minimum distributions, commonly called RMDs, from the account each year. If the taxpayer doesn’t need the money and doesn’t want to pay the tax on the distribution, he or she can have the RMD distributed directly to a qualified organization and avoid the tax bill. This transaction essentially cuts the IRS out of the deal, so it is quite popular with both charities and the donors who fund them.
Since donations are tax-deductible in the year given, there is no time like the present to plan your giving strategy for the year. For more on charitable contributions, itemizing, the Tax Cuts and Jobs Act or other tax matters, consult a licensed tax professional like an enrolled agent, certified public accountant or attorney.