Preface: We all want a simpler code, but tax reform is about much more. It is about ensuring that everyone pays their fair share. The tax code is also used to promote behavior that we as a nation support, such as home ownership or charitable contributions. –Charles B. Rangel
Tax Planning: Charitable Giving
The majority of taxpayers are probably already aware that they can get an income tax deduction for a monetary gift to a charity when itemizing tax filing deductions on Schedule A. But there is a lot more to charitable giving.
Firstly, under the current tax legislation, for example, you are permitted to give appreciated property to a charity without being taxed on the appreciated gains. In addition, fort these reasons, and more, charitable giving may be an important part of your overall estate planning. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. This blog is to introduce you to some of these charitable giving requirements and tax saving techniques.
To begin, let’s look at the basics – Your charitable contribution giving can help minimize your tax bills only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes.
An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.
Non-Itemizing Tax-Payers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows an above-the-line deduction for non-itemizers in tax year 2020, However, unlike the provision under the CARES Act, the deduction for 2021 is claimed as deduction in calculating taxable income and not as an above-the-line deduction in calculating adjusted gross income. Individuals can take a $300 deduction against taxable income even if they do not itemize. The contribution must be made in cash. The cash must be contributed to churches, nonprofit educational institutions, nonprofit medical institutions, public charities, or any other qualifying 501c3 organization.
Itemizing Tax-Payers
Under the 2017 Tax Cuts and Jobs Act, the percentage limitation on the charitable deduction contribution base is increased from 50 percent to 60 percent of an individual’s adjusted gross income for cash donations to public charities in 2018 through 2025. There is an even greater benefit, because in addition, for 2021 you can elect to deduct up to 100 percent of your AGI with charitable contributions (formerly 60 percent prior to the CARES Act).
The income-based percentage limit is temporarily eliminated for an individual taxpayer’s cash charitable contributions to public charities, private foundations other than a supporting private foundation, and certain governmental units for 2020 and 2021. An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.
Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate.
An individual may carry forward for five years any qualifying cash contributions that exceeds his or her adjusted gross income. Partners in a partnership and shareholders in an S corporation may also deduct qualified charitable contributions that do not exceed their adjusted gross income.
Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30 percent of adjusted gross income. A special limitation also applies to certain gifts of long-term capital gain property.
Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.
Taxpayers over 70 ½ years of age are allowed an exclusion from gross income for distributions from their IRA made directly to a charitable organization of up to $100,000 ($100,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.
Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. Your donations must be substantiated. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation.
However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.
There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.
If you enjoy charitable giving as part of your tax planning, please do not hesitate to contact us with your tax questions about any of the tax giving benefits raised in this blog.