Year-End Charitable Gifting FAQs
If you are making charitable donations this holiday season, you stand to benefit from understanding the potential tax savings that can be achieved through proper planning. By addressing these three frequently asked questions about year-end philanthropy, you can strategically maximize the impact of your gift.
How do I deduct charitable gifts from my tax return? To deduct charitable donations, you must itemize them on the IRS’ Schedule A and save documentation in case of an audit. The IRS needs to know three things: the name of the charity, the gifted amount and the date of your gift.
From a tax planning standpoint, claiming itemized deductions is only worthwhile when these line items exceed the standard income tax deduction ($12,000 for individuals, $18,000 for heads of household, $24,000 for joint filers).
Also, in order to qualify for an itemized deduction, your donation must go towards a qualified charity with 501(c)(3) non-profit status. To verify the tax-exempt status of your favorite charities – and to discover more about how effectively the organization utilizes donations – visit www.CharityNavigator.org.
Is it more beneficial to make outright gifts of cash or to donate other assets? Donating securities – especially those that you have held for more than one year – can be a tax-savvy move. By authorizing your bank or brokerage institution to transfer shares directly to a charity, you can avoid paying the capital gains tax on assets you have held for more than one year.
Additionally, you can take a current-year tax deduction for the full fair market value of the donated shares, and the charity will receive the full before-tax value of the shares.
As a retiree, what are some other tax-efficient methods for charitable giving? If you are not dependent on the income generated from your traditional IRA, you may consider making a qualified charitable distribution (QCD) from your account.
Traditional IRA owners ages 70½ and older can arrange direct transfers of up to $100,000/year from an IRA to a qualified charity. The full amount of your annual QCD is excluded from your adjusted gross income for the year, and these gifts can satisfy some or all of your required minimum distributions.
Secondly, if you have an unneeded life insurance policy, you might consider gifting that policy to a qualified charity. In doing so, you can benefit from a current-year income tax deduction; and if you keep paying the policy premiums, each payment could become a deductible charitable donation.
A donor-advised fund (DAF) can also be a viable option for providing you with a significant charitable deduction. Especially given the changes to the standard deduction under the new tax law, utilizing a donor-advised fund for your philanthropic endeavors can provide you with a larger itemized deduction today for ongoing grants to your preferred charities in future years.
Your planned giving strategy will depend upon your individual circumstances and the nuances of your family’s wealth management plan. Plan well and your efforts will be rewarded!