During the holiday season, we tend to be thinking about those who may not be as fortunate or who have a hard time making ends meet this time of year. We open our checkbooks and donate money to charities. We purchase toys for those families that may not have the means to buy gifts to put under the tree. We pack up our gently used items and give them to organizations that distribute or sell them to those in need. There are many benefits associated with charitable giving, lower blood pressure, depression, stress level, to name a few. Many of these benefits will coincidentally help us get through the stress of the holiday season. However, with the right planning some might help you get through tax season.
With the holiday season behind us and tax season upon us, the following is an overview of six different charitable contributions and how to reap their tax benefits.
Charitable donations of various sorts may be deductible on your individual income tax return. But there are limitations and documentation rules that must be followed in order for you to take these deductions. To be deductible, the total allowable itemized deductions must exceed your standard deduction. These amounts were increased with the passing of the Tax Cuts and Jobs Act of 2017. For example, if you are a married filing joint taxpayer, your itemized deductions need to be greater than $24,000 to be of any benefit. Many types of itemized deductions were eliminated or limited with the new tax act. Cash donations are now limited to 60% of adjusted gross income (previously limited to 50%). But for the most part the deduction for charitable donations remains the same.
Keep in mind that you aren't limited to deductions for donations of cash. We'll discuss the following types of donations and their requirements for claiming your deductions:
- Cash Donations
- Quid Pro Quo Contributions
- Household Items and Clothing
- Corporate stock and mutual fund investments
- Direct donations from IRAs
All the above are deductible if the appropriate steps are taken to document the gift. Keep reading for more information.
- To be deductible, cash donations must be made to a public charity (501(c)(3) organization).
- Donations made to an individual are not deductible.
- You must provide proof of your donations to deduct any cash donations. Bank records or a receipts from the charitable organization are the only acceptable forms of proof.
- For cash donations over $250; A written acknowledgement from the charity must be obtained before the due date of your tax return.
Quid Pro Quo Contributions
Sometimes donations are made as part of a payment for goods or services. For example, when a taxpayer purchases a ticket for a charitable dinner. The dinner is the service and it's value is not deductible as a donation. However, any amount above the fair market value listed on the acknowledgment letter is deductible. In these cases, if the donation is more than $75, you must get a receipt (from the charity) that states the fair market value received.
Another example of a quid pro quo contribution is an annual membership to a local zoo or museum. Typically, the value of the membership is lower than the amount you paid. You can deduct the difference as a charitable donation. Again, remember to retain proof provided by the organization, of the amount paid and the value.
Household items and clothing
Non-cash donations given to organizations such as Goodwill Industries have a few restrictions.
- All donations of household items and clothing must be at least considered in good condition or the deduction is not allowed.
- You must have a receipt to deduct any donation greater than $250.
- If all your non-cash donations made during a tax year have a sum greater than $500, you must attach Form 8283, Non-cash Charitable Contributions, to your tax return.
When donating a vehicle, the amount of the deduction is dependent on what the charity plans to do with it after receipt.
- If the charity plans to sell the vehicle; the charitable deduction the lesser of:
- the amount that the organization receives on the sale or
- the fair market value on the date of donation.
- If the organization intends to keep and use the vehicle; the donation will equal the fair market value of the vehicle on the date of donation. The fair market value is equal to the Kelly Blue Book value.
You should get a form 1098-C from the organization within 30 days of your donation or when the vehicle is sold by the charitable organization.You must attach Copy B of Form 1098-C to your tax return to claim this deduction. If Form 1098-C is not received with your tax return, your deduction will be rejected.
Corporate Stock and Mutual Fund Investments
Donating appreciated securities to a charity can be more advantageous than donating cash. The deduction would be equal to the fair market value of the stock on the date of donation and in addition the taxpayer receives the benefit of not having to pay capital gains tax on the sale of the stock. However, if the donation is significant, it will be limited to 30% of the taxpayer's adjusted gross income. Any donation greater than the 30% limitation is allowed to be carried forward for 5 years and deducted on future tax returns.
Direct donations from IRAs
If you are over the age of 70 1/2 years old, you must take distributions annually from your Individual Retirement Accounts. These required minimum distributions are taxable at ordinary rates (up to 37%). However, you can donate your minimum distribution to a charity if you wish. Any required minimum distributions paid directly to a public charity are not reported as taxable income, thus saving up to 37% of tax. Regular cash donations are subject to various limitations and potentially do not have the same tax saving potential. Furthermore, this deduction is available regardless of the amount of itemized deductions and is not subject to the adjusted gross income limits
Distributions from an IRA to a public charity are reported on Form 1099-R and reported on Form 1040. However, they are not taxable and must be labeled as a Qualified Charitable Distribution (QCD).
The holiday season may be behind us but don't let that stop you from helping others less fortunate if you feel so inclines. If your heart breaks for the survivors of the tragedy which recently happened in our beloved city of Pittsburgh, consider any number of the above options for charitable donations. Most, if not all, will bring you a number of health benefits along with the potential extra tax saving benefit.