With the holidays approaching, charitable giving is top of mind for many people. In addition to helping those who are less fortunate, you may also be able to reap valuable tax benefits by giving money and assets to qualified charities.
Here are some steps you might think about to obtain tax benefits when making charitable donations.
Make Outright Charitable Gifts
You can generally deduct cash, securities and property donated to qualified charitable organizations — which are also referred to as 501(c)(3) organizations — on your federal income tax return. Religious institutions and organizations like the Salvation Army, Goodwill Industries and the United Way typically qualify as 501(c)(3) organizations.
Keep in mind that the total amount you can deduct for charitable contributions may be limited if your adjusted gross income (AGI) exceeds certain limits. Your annual charitable deduction is also generally limited to no more than 50% of your AGI (although 20% and 30% limitations apply to some kinds of donations and charitable organizations).
Charitable donations are only deductible if you itemize deductions on your tax return, which you’ll list on Schedule A (Form 1040). If you claim the standard deduction, however, you can’t deduct your charitable contributions.
Qualified charitable donations you make by December 31, 2017, may be deducted on your 2017 income tax return. If you wait until after this date to make a donation, you’ll have to wait until you file your 2018 tax return to take the deduction.
Keep Good Records
It’s important to keep good records supporting your charitable donations in case you need to substantiate them to the IRS. For cash contributions, retain a canceled check, bank statement, credit card statement, receipt, or letter from the charity that shows the charity’s name and the date and amount of the contribution. For contributions of $250 or more, you must have a written acknowledgement of the donation from the charity.
For non-cash contributions valued at less than $500, you will need to obtain a receipt from the charity that contains a description of the property you’ve donated. For these types of contributions that are valued between $500 and $5,000, you must obtain an acknowledgement that includes how and when you obtained the property and the cost or other basis. And for non-cash contributions valued above $5,000, you must obtain a written appraisal of the property from a qualified appraiser.
Establish a Charitable Foundation
If you plan to make relatively large charitable contributions, you might benefit from establishing a charitable foundation. These can take several different forms, including a private family foundation, community foundation, or Donor Advised Fund (DAF).
A private family foundation would make grants to charitable organizations you choose. A community foundation is similar but would be administered by outside professionals who direct your contributions as they see fit in order to benefit the designated community. And a DAF is similar to these but is easier and less expensive to set up and maintain.
A DAF is a fund established in your name at a specific charitable organization. It exists within a pool of money managed by the charity on behalf of multiple donors. You can decide how your contributions of cash and property are invested and distributed while receiving a deduction during the year when contributions are made.
Use Trusts as a Charitable Giving Tool
Charitable trusts can be a valuable tool for giving away assets to charities in a tax-advantaged manner after you die. There are two main types of charitable trusts:
- Charitable Remainder Trust (CRT) — You would contribute cash or property to the trust and receive income (or your beneficiaries would receive income) for a certain number of years. Assets that remain in the trust after your death would pass to the designated charity tax-free in most situations.
- Charitable Lead Trust (CRT) — You would contribute cash or property to the trust and the charity would receive income for a certain number of years. Assets that remain in the trust after your death would pass to your beneficiaries tax-free in most situations.
‘Tis the season for charitable giving. Remember, in order to claim tax deductions for charitable contributions on your 2017 tax return, you must make contributions no later than December 31, 2017 – so you should likely start setting your year-end charitable giving priorities now while there’s still some time to get organized. A financial advisor can help you figure out how charitable giving fits into your overall financial plan.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.
Gregory DePalma, CFP®
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