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- February 26, 2024
Charitable Tax Planning: How to Do it Like a Pro?
Charitable giving supports the causes you care about and offers significant tax benefits. Understanding how to optimize your charitable contributions can lead to more effective giving and tax savings. Here’s everything you need to know about charitable tax planning.
Understand the Basics
Donating to a charity may be eligible for an income tax deduction in the year you make the gift. This deduction usually matches the amount of cash or the fair market value (FMV) of the property you contribute. However, the deduction limits vary depending on the contribution type and the recipient organization.
Deductible Contributions
When you make charitable contributions, understanding the eligibility for tax deductions is crucial. Primarily, deductions are available for donations to organizations recognized under section 501(c)(3) of the Internal Revenue Code. This classification encompasses many nonprofit entities dedicated to religious, charitable, scientific, educational, and other exempt purposes. For example, donating $1,000 to a local 501(c)(3) charitable organization is generally deductible in the year you contribute.
It’s important to note that while contributions to U.S.-based 501(c)(3) organizations and certain government entities are deductible, donations to noncharitable organizations, social clubs, political organizations, or charities established outside the United States usually do not qualify for a tax deduction. This distinction ensures that your contributions are not only generous but also tax-efficient.
Deduction Limits
The IRS sets specific limits on the amount you can deduct based on the type of donation and the recipient organization:
- Public Charities: You can deduct up to 60% of your adjusted gross income (AGI) for cash donations to public charities. For instance, if your AGI is $100,000, you could deduct up to $60,000 in cash contributions. For donations of appreciated property, such as stocks or real estate, to public charities, the deduction limit is 30% of your AGI. This means if your AGI is $100,000, you could deduct up to $30,000 for donations of appreciated property.
- Private Foundations: Contributions to private foundations are subject to more stringent limits. Cash contributions to nonoperating private foundations are deductible up to 30% of your AGI. So, with an AGI of $100,000, up to $30,000 in cash donations to these foundations could be deductible. For appreciated property donated to nonoperating private foundations, the limit is 20% of your AGI, allowing for a $20,000 deduction on a $100,000 AGI.
Excess Contributions
If your charitable contributions exceed the AGI-based limits in a given year, the IRS does not force you to forfeit the excess deduction. Instead, you can carry forward unused deductions for up to five years, applying them to future tax returns within the same AGI limits. For example, if you donate $75,000 in cash to a public charity with an AGI of $100,000, you exceed your deduction limit by $15,000 ($75,000 donation – $60,000 limit). This excess can be carried forward, allowing one to deduct it in a subsequent tax year.
Types of Contributions
Cash Donations
Cash donations are the most straightforward way to contribute to charities. They are easy to document and the deduction is directly tied to the amount given, subject to the income-based limits described earlier. For instance, considering the AGI limits, if you donate $5,000 in cash to a qualifying charity, this amount can be directly deducted from your taxable income.
Services
While the IRS does not allow deductions for the value of services donated to a charity, such as volunteer time, out-of-pocket expenses incurred during volunteering are deductible. This includes costs for materials, supplies, and even mileage driven for charitable service, calculated at the standard charitable mileage rate set by the IRS (14 cents per mile for 2023). For example, if you drive 100 miles for a charity event and incur $50 in supplies, you can deduct $64 (100 miles * $0.14 + $50) as a charitable contribution.
Property
Donating property, such as stocks, real estate, or other valuables, offers additional tax benefits, particularly for items that have been appreciated. When you donate property held for more than one year, you’re generally allowed to deduct the property’s fair market value (FMV) at the time of the donation, not just your cost basis. Donating stocks worth $10,000 that you originally purchased for $4,000 can deduct the full $10,000 FMV without paying capital gains tax on the $6,000 appreciation.
Special Considerations
Cryptocurrency Donations
Since the IRS treats cryptocurrency as property for tax purposes, donating cryptocurrency has benefits similar to donating other forms of appreciated property. You can deduct the FMV of the cryptocurrency at the time of donation and avoid paying capital gains tax on the appreciation. This makes cryptocurrency an attractive option for charitable contributions, especially for assets significantly increased in value.
Future Interest Contributions
Donating a future interest in property, such as through a charitable remainder trust (CRT), allows you to take a current tax deduction while retaining some benefit from the property, such as income, for a period. For example, a CRT might provide you with income during your lifetime, with the remainder going to a charity upon your death. The initial donation to the trust is deductible in the year the trust is funded, based on a calculation of the present value of the remainder interest that will eventually go to the charity.
Recordkeeping is Key
Proper documentation is crucial for all types of charitable contributions to ensure you can substantiate your deduction if questioned by the IRS.
- Cash Donations: Keep bank records, receipts, or written acknowledgments from the charity showing the charity's name, date, and contribution amount.
- Property Donations: Maintain records that describe the donated property, its FMV at the time of donation, and how the FMV was determined. For donations valued at more than $500, you must complete Form 8283 and attach it to your tax return. A qualified appraisal is generally required for items valued over $5,000, except for publicly traded securities.
Why Consult with Experts like CROWNGLOBE?
Consulting with experts like CROWNGLOBE for charitable tax planning offers numerous benefits, ensuring your philanthropic efforts are both impactful and optimized for tax advantages:
- Tailored Advice: CROWNGLOBE experts provide personalized guidance based on your financial situation and philanthropic goals, ensuring your charitable contributions align with your overall tax strategy.
- Maximize Deductions: They can help identify the most tax-efficient ways to make your contributions, ensuring you take full advantage of available deductions and minimize your tax liability.
- Complex Asset Contributions: Expertise in handling donations of complex assets such as real estate, stocks, or cryptocurrency, navigating the specific rules and regulations to optimize your tax benefits.
- Understanding of Regulations: Stay up-to-date with the latest tax laws and regulations regarding charitable giving, ensuring your donations comply and avoid potential pitfalls.
- Strategic Planning: Assistance in planning your charitable contributions over time, including setting up charitable trusts or donor-advised funds to create a lasting impact and achieve long-term tax efficiency.
- Recordkeeping and Documentation: Guidance on proper recordkeeping and documentation needed to substantiate your charitable deductions, ensuring compliance with IRS requirements.
- Avoiding Penalties: Expert advice helps avoid common mistakes that could lead to penalties or disallowed deductions, providing peace of mind about the legality and efficacy of your contributions.
- Impact Analysis: Insights into how your charitable giving fits into your broader financial picture, including estate planning and retirement, to maximize both your philanthropic impact and financial health.
Smart charitable tax planning enables you to support your favorite causes while optimizing your tax benefits. By staying informed and seeking professional advice, you can significantly impact the charities you support and on your tax return.
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