Christmas is quickly approaching, which means year-end tax planning is in full swing for those of us in public accounting. With the spirit of Christmas in my heart and numbers on my mind, I want to take a moment to share some smart giving tools. Charitable donations are a tax benefit often overlooked, but they can provide significant tax savings if done correctly. As an accountant, I love the idea of indulging my philanthropic heart while reducing my own taxable income.
Cash is the most commonly donated item to charitable organizations. Are all cash donations deductible for tax purposes, including what you drop in the red bucket as you walk in a store? According to the IRS, the donation must be made to a qualifying charitable organization — e.g., churches, 501(c)(3) organizations, private foundations, etc.
You cannot take a tax deduction for the money you give directly to an individual, no matter how charitable your heart may be. However, if you gave that same amount of money to a qualifying charitable organization, designated the fund or earmarked it for a particular purpose within that charity, you would receive a tax deduction, which could potentially save you 33 cents on the dollar, depending on your tax bracket.
Whether you donate cash, clothing or other household items to a charitable organization, the donor must receive a contemporaneous written acknowledgment if the donation is more than $250. There is a misunderstanding about this threshold and whether it is cumulative or based on an individual donation. For example, a person may give $200 each week to her church and assume that since it is less than $250 per donation, she does not need a receipt for the year in order to claim a tax deduction for the total amount given.
Because the acknowledgement rule requires you to look at the cumulative amount given for the year in order to receive the qualifying itemized deduction, the donor needs a written acknowledgement from the church showing the total amount given in order to deduct the gifts. Furthermore, the receipt must be dated prior to the date the donor files her tax return AND must include the “magic language” stating “no goods or services were received by the individual” in order for the receipt to qualify as a contemporaneous written acknowledgment.
But cash is not the only way you can help your favorite charity or cause. There are other items that can be donated to a charitable organization that are less traditional, yet can provide even greater tax benefits and indulge your philanthropic heart.
Appreciated property, marketable securities and publicly traded stocks are items that are ideal for smart giving. If an individual sold an investment and then donated the cash proceeds, she would have to pay capital gains tax on the net gain. Alternatively, if the individual took that same investment and donated it directly to a charity, she is allowed to take a deduction for the fair market value of the investment at the date of donation and avoid any capital gains tax.
Depending on the value of the noncash item being donated, there may be additional substantiation requirements that need to be satisfied in order for you to receive the full tax deduction benefit, so be sure to consult with your CPA if you’re considering these types of donations.
Another overlooked avenue for smart giving is a direct gift from an IRA to a qualified charity. IRA owners (over age 70) who are required to receive a minimum distribution can use this smart giving tool by having their required minimum distribution (RMD) sent directly to the organization. By removing the RMD from your taxable income, it can lower your overall income, which may make the difference in Social Security income being taxable, jumping to a higher tax bracket or impacting Medicare premiums. There are even some charitable organizations that will match a dollar amount or percentage of your RMD at certain times of the year, thus potentially doubling your giving and providing more dollars to your charity of choice.
Although we give from our hearts, it’s often a good idea to be thoughtful of your own finances as well. There’s no reason we can’t benefit from our own Christmas spirit and potentially increase our impact in our community through smart giving. After consulting with your CPA and learning how to give smartly, you may find that you want to give even more this holiday season!