Americans are a generous people. According to the National Philanthropic Trust, Americans–between cash, property and other charitable donations–contributed more than $389 billion to various causes in 2016. That’s a nearly 5 percent increase from 2015.
Everyone has their own reason for donating their hard-earned cash or property to charities of their choice, and a genuine desire to give back is typically at the top of most donors’ minds. But even the most ardent, most philanthropic, most committed-to-the-cause donors have something else in mind as well.
U.S. tax law allows individual taxpayers to deduct charitable contributions of up to 50 percent of their adjusted gross income. That’s a major incentive to cut a check to your alma mater or favorite nonprofit organization at the end of the year! But, before you do that, it’s important to think about your options. There are several tax strategies that could help you save money while doing a good deed.
Making a cash gift is a popular (and generous) way to contribute to the nonprofit organization of your choice. But it’s not the only way to do it. Rather than donating cash, strategic taxpayers may consider donating appreciated stock, property or even transferring their required minimum distribution (RMD) from their IRA directly to a charity.
Implementing these strategies may help taxpayers avoid other taxes. For example, if you’ve owned appreciated stock for more than one year, you can avoid paying capital gains tax on the appreciation by directly transferring it to a charity. And you’ll get a charitable contribution deduction equal to the fair market value of the stock. Or, if you are over age 70 ½ and have an IRA account, you can transfer your RMD (up to $100,000) to a qualified charity and reduce your adjusted gross income. Reducing your adjusted gross income rather than claiming a charitable contribution deduction may offer a better tax result.
In response to this year’s devastating hurricanes, Congress suspended the AGI percentage limitation as well as the overall itemized deduction phase out rules with respect to charitable contributions associated with hurricane relief. Therefore, assisting with hurricane relief efforts may provide an enhanced tax benefit in 2017.
If you decide to donate property rather than cash, it’s important to pay close attention to the property’s value. Tax law sets forth different substantiation requirements based on the type and value of donated property. Without the proper substantiation, the IRS can deny the charitable deduction.
Property valued at less than $250
This is typically the most common deduction claimed by average taxpayers. It covers the box of lightly used winter clothes sitting in your spare bedroom, or the bicycles in your garage that your kids have outgrown. To deduct property valued at less than $250, taxpayers must receive (and keep!) a receipt from the charity.
Property valued at $250 – $499
In addition to the simple receipt, taxpayers donating items in this value range must also obtain, in writing from the charity, a description of the property donated and an indication as to whether or not the donor received any goods or services as a result of or in exchange for the contribution.
Property valued at $500 – $4,999
Taxpayers must obtain the records described above, plus include a detailed record of how they originally acquired donated item. Taxpayers must attach Form 8283 to their tax returns when the value of non-cash contributions exceeds $500.
Property valued in excess of $5,000
Taxpayers must obtain all records described above, plus an official, independent appraisal of the donated item. Again, Form 8283 must be attached to the taxpayer’s tax return and may need to be signed by both the independent appraiser and the charity.
Claiming a charitable deduction for donating a vehicle will require additional compliance. Depending on the fair market value of the donation, the donor will have to obtain the appropriate documentation listed above. They’ll also be required to present documentation showing that the charity is either a) using the vehicle to advance the charity’s stated mission; b) planning to make material improvement to the vehicle; or c) planning to donate or sell the vehicle to a needy individual at a significantly below-market price. The charity may provide Form 1098-C to the donor to provide this information. Form 1098-C must be attached to the donor’s income tax return if the claimed charitable contribution exceeds $500.
Pending legislation, if enacted, will have an impact on charitable giving. First, the limitation for deducting cash gifts to charity would increase in 2018 to 60% of AGI from the current 50% AGI limit. Second, the standard deduction is scheduled to increase substantially over 2017 amounts and certain itemized deductions would be limited or eliminated. This would lead more people to claim the standard deduction rather than itemizing their deductions and may effectively eliminate any tax deduction for charitable contributions beginning in 2018. As a result, effected taxpayers may wish to make additional contributions in 2017 while they can still get a benefit from the deduction. Alternately, taxpayers over age 70 1/2 may wish to make future charitable contributions directly from their IRAs, as noted above, if they won’t be itemizing deductions going forward.
Since charitable donations are only deductible for the year in which they were made, interested donors looking to claim a deduction need to finalize their gifts in the next few months.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.