With the holiday season upon us and the end of the year quickly approaching, it is a time when both giving thanks and charitable giving may come to mind. Donations, which are beneficial to recipients, may also be beneficial to the giver, since there are tax benefits associated with charitable giving. This may also enhance one’s ability to give and should be considered regarding year-end tax planning.
Tax deduction for charitable gifts
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help you potentially increase your gift.
For example: Let’s assume you want to make a charitable gift
of $1,000. One way to potentially enhance the gift is to increase it by any
income taxes you save with the charitable deduction for the gift. The math
looks like this: at a 24% tax rate, you could give $1,316 to charity
a net cost to you of $1,000 because you would save $316 in taxes [$1,316 x 24%
= $316]. But at a 32% tax rate, you could give $1,471 to charity at a net cost
to you of $1,000 [$1,471 x 32% = $471 taxes saved].
However, remember that your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.
For 2020 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction for direct cash gifts to public charities (besides the standard deduction).
Be sure to retain proper substantiation of your charitable contribution. To claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
Year-end tax planning
When making charitable gifts at the end of a year, consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.
For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and contribute in January so you can take the deduction next year when the deduction results in a greater tax benefit. Or, you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. If the income percentage limits above are a concern in one year, you might consider ways to shift income into that year, or shift deductions out of that year, so a larger charitable deduction is available for that year.
A tax professional can help you evaluate your individual tax situation.
A word of caution
Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax Exempt Organization Search tool. It is recommended to contribute by check or credit card and not send cash to protect your donation.
For more information, please contact us at 401-831-0200.