The holiday season is all about abundant generosity, with many Americans donating more of their time and money to the causes they care for most. In addition to the clear humanitarian benefits charitable giving provides, donors also have opportunities to make their gifts tax-deductible.
To make your donations count in terms of tax law, be sure you first understand the essential recordkeeping tips. For those who wish to venture beyond cash donations, a few more advanced giving strategies may be worth considering.
Some practical reminders for record keeping:
- Gifts by cash or check are the most common way charitable gifts are made. Be sure your gifts meet the IRS requirements for deduction on your tax return.
- In order to deduct any monetary donation, a taxpayer must have either a bank record of the gift or a written statement from the charity stating the date of the contribution and the amount.
- When deducting donations greater than $250, the taxpayer must obtain and keep a contemporaneous written acknowledgment for a charitable contribution. To be contemporaneous, the written acknowledgment must generally be obtained by the donor no later than the date the donor files the return for the year the contribution is made.
- Multiple donations throughout the year can be summarized on one year-end statement from the charity. Keep these documents with your tax files in case the IRS ever comes knocking for documentation on your deductions.
- Gifts must be made before the end of the calendar year to be deductible. Giving by credit card at year end is allowed, even if you do not pay off the credit card until the next year.
A note on household item donations
Donations of household items also qualify for charitable deduction, so long as those items are in good used condition or better.
It’s important to remember donations that total more than $250 must have a written receipt from the charity describing the items donated. When donating more valuable items, it may be necessary to obtain an appraisal to support that value for your tax deduction.
In most cases, the charity will not instruct the taxpayer on the value of their donation, but the items should be valued at their fair market price—essentially what someone would pay to purchase the items. Thrift stores often provide a price list that can be used as a reference to determine a reasonable value of common items, so be sure to request this when needed.
Charitable gifting strategies to consider
Outside of the standard cash or item donations, there are several alternative approaches to accomplish your gifting objectives.
Consider the following:
1. Give appreciated securities rather than cash.
Stocks, bonds or mutual funds that have appreciated in value over the years likely have substantial unrealized capital gains. When the owner sells these securities, capital gains tax is owed that year. However, if the appreciated securities are donated directly to a public charity, no capital gains tax is owed and the donor receives a full charitable deduction. The charity will usually sell the security upon receipt and will also pay zero gains tax due to their tax-exempt status.
In order to qualify to deduct the market value of the donated appreciated security as a charitable deduction, you must have purchased the security at least one year prior to the donation. For securities purchased less than one year prior to donation, your deduction is limited to the original amount you paid (i.e. your cost basis). If you own appreciated assets held for a long time with an unknown original basis, donating them also avoids the headache of having to figure out the original value needed to calculate capital gains tax.
Donors can also contribute appreciated private company stock, real estate and other less traditional assets directly to charity. The process will require more effort and likely the help of a professional, but it can be advantageous. For example, an entrepreneur who started a successful business from nothing 30 years ago may have very little cost basis in the private company stock. If the company is sold, a large taxable gain may be incurred by the owner. However, if some of the stock were donated to a charity first, the former owner may avoid capital gains tax and receive a sizable charitable deduction.
2. Qualified charitable distributions from an IRA
Congress made this strategy permanent in the tax code in 2015 for taxpayers over 70 ½ who are required to take annual minimum distributions from their IRAs. These required minimum distributions (RMDs) from IRAs are typically fully taxable to the owners, but if they are donated directly to a qualified charity, they simply are not included in taxable income. This deduction is limited to $100,000 per person, per year.
This may be beneficial to the charitable-minded who claim the standard deduction on their tax return. Since these donations are excluded from taxable income (rather than considered an itemized deduction), taxpayers still receive a benefit from the donation even when claiming the standard deduction. This strategy may also benefit those with high incomes who are subject to phaseouts on their itemized deductions, or who are already maximizing deductible annual charitable contributions.
3. Consider establishing a donor-advised fund
Donors able to give larger dollar amounts can contribute money to a donor-advised fund and receive an immediate tax deduction. The donor-advised fund allows them to decide at a later point where and when the charitable gifts will be made. In the meantime, the funds can be invested for growth.
This can be particularly useful at year-end because it allows the donor to make a large gift and take the tax deduction immediately, but it does not require the donor to decide which charities receive the funds or on what timetable.
4. Consider giving in your estate plan
One of the best gifts you can leave to your family is a well-organized estate with clear instruction on your intentions. For those wishing to leave a charitable legacy, there are a host of ways to accomplish this by outlining your wishes in your will and other estate planning documents.
As with all aspects of financial planning, earlier is always better. Once you’ve established a plan, revisit your estate documents regularly to ensure they’re accurate and up-to-date. With missing or incorrect designations, your assets may not be distributed as you intend or your charitable beneficiaries may have to wait to take ownership and incur additional costs.
Of course, these strategies are only a few among several options you have when it comes to making the most of your philanthropy. Depending on your goals, and considering the causes near-and-dear to your heart, our team of seasoned planning professionals can help make charitable giving an integral part of your overall financial plan.
As Lead Advisor, Kyle works closely with clients and their families to develop, implement and monitor tailored financial solutions. A CPA since 2009 with over 9 years of experience in financial services, Kyle has a deep knowledge of holistic financial planning, investments and tax matters. If you have questions relating to this or other financial planning topics, contact Kyle at firstname.lastname@example.org.