If you’re looking to help others with your money while receiving tax benefits and tax savings, you’ve come to the right place. Here are five topics related to charitable giving that can provide excellent tax advantages for you:
1. Charitable Contributions
Gifts to charity are one of the best tax saving opportunities available. Not only does the charity benefit, but the taxpayer receives a tax deduction. Of course, as with most tax deductions, there are limits to charitable contributions. These are updated yearly, so the Internal Revenue Service (IRS) makes Publication 526 available for questions and clarification on claiming a charitable deduction.
There are many charities, and many ways to contribute. Here are a few tips to help clarify this confusing topic:
- You can deduct the cost of transport to and from volunteering at qualified charitable organizations.
- Clothing and housewares can be tax deductible when they are given in good/usable condition to a charitable organization. However, items valued at a $500+ must have a written appraisal.
- It’s important to note that donating to foreign charitable organizations and donating blood are generally not tax deductible.
2. Income Tax Deductions and Contributions
To deduct a contribution, the charity you donate to must be qualified according to IRS standards. You can’t give Aunt Linda $50 and deduct it as a charitable contribution. Neither can you deduct political contributions or donations to candidates.
For qualified contributions, you must file IRS Form 1040 and itemize deductions on Schedule A to claim a charitable deduction. Some charitable contributions come with benefits that may affect the amount you can deduct. For example, if you buy a T-shirt from a qualified charitable organization, the entire price of the shirt isn’t deductible - only the contribution value less the worth of the T-shirt can be claimed. So if you pay $40 for a shirt, and the stated value of the T-shirt is $15, then the deductible amount of the gift is $25 ($40 - $15). This concept also applies when bidding at a charity auction. You can deduct the difference between what you paid for an item at auction and its fair market value.
The IRS has a limit on giving, but even if your heart exceeds the IRS maximum, you may still be able to benefit from your generous spirit. You may deduct a maximum of up to 50% of your adjusted gross income (AGI) (Line 36 on IRS Form 1040) for the tax year the donation was given. However, if you give more than 50%, the excess may be carried forward for up to five years, reducing the amount you can contribute in each of those years (contribution amount = 50% AGI – excess rollover from previous year). Be aware that the 50% rule applies for contributions of most types to most charities, but certain situations may have lower limits. Seek guidance, especially before significant donations.
3. Alternative Minimum Tax (AMT)
The AMT can be a daunting and complex subject. It’s important to understand the basic principles of AMT, however, because it impacts a significant number of taxpayers and their charitable planning.
The AMT is essentially a parallel tax system. It was implemented in 1969 to ensure that the wealthiest taxpayers did not take advantage of too many tax benefits. Each year taxpayers need to calculate their taxes under both the regular tax system and the AMT. Once they have calculated their tax liability under each system - adding up all of their income and then taking deductions for items such as property taxes, state income taxes, mortgage interest, and charitable contributions – they compare each amount and pay the higher of the two.
So, what does it mean if you must pay the AMT? First, the good news - the AMT has a maximum rate of only 28 percent. That is lower than the 39.6 percent maximum rate for ordinary income taxes. The bad news is that the 28 percent rate may be applied to a larger taxable income number. Why? Because the AMT takes away a number of tax benefits granted under the regular tax system.
The most common itemized deductions that are not deductible under the AMT include:
- State and local income taxes
- Real estate taxes
- Home mortgage interest (if the loan was not used to buy, build, or improve a home)
- Miscellaneous itemized deductions (e.g., investment advisory fees, and tax preparation fees)
If you look back at the list above, you will notice that charitable contributions are not one of the deductions lost when a person is subject to the AMT. As a result, many AMT taxpayers will still receive a tax savings when they make charitable contributions.
4. Donating Appreciated Assets
This method of giving has become increasingly popular in recent years. The charitable contribution of long-term appreciated securities — i.e. stocks, bonds and/or mutual funds that have realized significant appreciation over time — is one of the most tax-efficient ways to give. Donating appreciated assets has two key advantages:
- Any long-term appreciated securities with unrealized gains (meaning they were purchased over a year ago, and have a current value greater than their original cost) may be donated to a public charity and a tax deduction taken for the full fair market value of the securities— up to 30% of the donor's adjusted gross income.
- Since the securities are donated rather than sold, capital gains taxes from selling the securities no longer apply. The more appreciation the securities have, the greater the tax savings will be.
5. Donor Advised Funds
One of the most popular methods for giving right now is through donor-advised funds, which are sponsored by public charities. Donors make irrevocable contributions of cash, appreciated securities, or other assets. As the donor, you then recommend grants to qualified nonprofit organizations on your own timetable, often with the ability to remain anonymous. According to the National Philanthropic Trust, contributions to donor advised funds grew 23.5 percent in 2013, handily outpacing all other giving vehicles such as private foundations and charitable trusts.
Donors are eligible to take the maximum tax deduction available for their irrevocable contribution since the charity owns and controls the assets. This also requires the donor to have only advisory privileges over the distribution of charitable grants. Donors may recommend where grant money is distributed, and the charity retains ultimate decision making authority.
The charity also will generally perform due diligence to verify that each organization to which a grant is recommended is an IRS-qualified public charity and qualifies for funds considering any restrictions specified by the policies of each sponsoring organization.
- Immediate tax deduction, up to 50% of adjusted gross income for cash, 30% for appreciated assets
- May eliminate capital gains tax for gifts of long-term appreciated securities
- Can often accept many types of assets
- Professional investment management
- Can name successors to continue family involvement
The ability to help others with your money while receiving tax advantages for yourself is a terrific opportunity - contact your Financial Advisor for questions and guidance related to your individual situation.
This article is intended as a convenient source of tax information, is general in nature and may not apply to your specific situation.As with all tax matters, we encourage investors to assess their particular situation with the help of their tax advisor.