Significant tax savings can be achieved through a properly planned program of gifts to charity. Although a contribution may be motivated by humanitarian reasons, it is nevertheless wise to take the tax considerations into account when making a contribution. Charitable giving can be divided into two general categories. First, there are donations that are made on a regular basis and involve relatively small amounts. Second, there is the large extraordinary donation often associated with estate planning. Different planning concepts govern each type of donation.
Individuals, such as you, who make charitable contributions, should take into consideration a number of factors when making the decision as to when and how much to contribute, including the deduction-limitation rules. Generally, the amount that you may deduct in a tax year cannot exceed 50% of your adjusted gross income. (Fortunately, the amount in excess of the limitation can be carried forward five years). However, lower percentages apply when donations are made to certain donees, when the contribution consists of capital gain property, and when contributions are made “for the use of” a donee rather than “to” a donee.
The IRS requires that contributions of $250 or more must be substantiated in order to be deductible. The burden is placed on you, as the donor, to request written substantiation because a canceled check may not be sufficient to support a deduction. The amount of the contribution is fully deductible whether it is paid by cash, check or credit card. However, a charitable deduction cannot be based on a mere pledge to pay. The pledge must actually be paid before the end of the year in which the deduction is claimed.
A charitable deduction is not allowed to the extent that you receive a benefit for the contribution, such as admission to a charity ball, banquet, show or sporting event. In such cases, payments qualify for the deduction only to the extent they exceed the fair market value of the privileges or other benefits received. In addition, no charitable deduction may be claimed for travel expenses, including meals and lodging, if there is a significant element of personal pleasure, recreation or vacation present in the travel.
A deduction is not allowed for the value of services contributed to the charitable organization. However, if you are active in such organizations, you should be aware that out-of-pocket expenses incurred while performing volunteer services are deductible as a charitable contribution. If you use your auto, you may also be able to deduct the standard mileage allowance of 14 cents per mile.
Noncash contributions present a unique set of planning opportunities. There are special rules for the donation of cars, boats, and planes if the claimed value exceeds $500. If you have appreciated assets, you may want to consider donating the asset rather than selling and donating the proceeds. Using this approach allows you to avoid the capital gains tax that results from selling the asset. In addition, the deduction amount is for the fair market value of the asset at the time of the donation, regardless of your basis. There are additional limitations and elections that must be considered when donating assets instead of cash, including the need for an appraisal.
Large contributions require special tax-planning considerations. First, you must determine whether or not it is advisable to make a contribution during your lifetime or at death. Thus, your income and prospective estate tax brackets must be considered. You should take into consideration the income tax deduction limitations mentioned above, and the fact that there are no limitations for estate tax charitable contribution deductions. Second, you should consider whether you can afford the gift, not only in the current year, but in future years as well. This requires an analysis of the financial needs of you and your family, which may indicate that some form of deferred charitable giving is appropriate.
We can assist you with your short-term and long-term charitable giving plans and answer any questions you may have regarding your overall tax plan. Please contact us at your earliest convenience to arrange an appointment.
Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015.