People tend to give their time, talent and treasure to help a cause near and dear to their hearts. If you give in any of these ways, the tax deduction you might receive probably doesn’t factor into this decision. That said, if you’re going to donate money or property, you might as well receive the tax benefit. Here are some points to consider when making a charitable contribution.
In general, charitable contributions are gifts of money or property to qualified organizations under Internal Revenue Code Section 501(c)(3) or other tax provisions. Social clubs, political organizations, individuals and most foreign organizations aren’t qualified to receive tax-deductible contributions. In addition, gifts to crowdsourcing sites like GoFundMe for charitable causes aren’t always to organizations meeting the IRS’ criteria for a tax deduction, so the recipient should be verified before claiming a deduction. An additional resource when determining whether to donate to an organization is the website GuideStar, which provides free information (login required) on charitable organizations and generally includes financial information such as the organization’s Form 990 tax return.
The Tax Cuts and Jobs Act (TCJA) has changed some of the aspects of charitable giving. The TCJA increased the standard deduction—for 2019 it’s $24,400 for married taxpayers filing jointly and $12,200 for single filers—and limited other itemized deduction items, so more people likely will use the standard deduction. To get total itemized deductions over the standard deduction amount, you may want to consider bunching your charitable contributions. Bunching is a strategy where contributions are made in alternating years, i.e., doubling your contribution in one year and not contributing the next year. The use of donor-advised funds can help smooth out your contributions so the charity still receives regular contributions. A donor-advised fund is a qualifying charitable organization that will hold and invest the contributed funds, and then you can advise the fund to distribute your contribution to qualifying charities over time. This allows you to take the full deduction in one year while still allowing the contribution to be spread over time. Please note that donor-advised funds can’t fulfill pledges.
The TCJA increased the deduction ceiling for cash contributions from 50 to 60 percent of adjusted gross income (AGI) and repealed the 80 percent charitable deduction allowed for donations to colleges or universities that included the right to purchase priority seating at sporting events.
While cash is generally the easiest kind of donation to make because cash donations are simple to substantiate and value, contributions of appreciated capital gain property can provide an additional benefit. In general, contributions of appreciated capital gain property (marketable securities, noncreated artwork, etc.) receive a deduction at fair market value (FMV) and donors don’t recognize a gain on the difference between their cost basis and the FMV. To receive the deduction at FMV, the property must have generated long-term capital gain—generally held for one year or longer—at the time of contribution if the property were to have been sold. The deduction is reduced dollar for dollar for any other unrealized gain, such as short-term capital gain or ordinary gain. Donations of property with a total combined value greater than $500 require additional disclosures on Form 8283. Donations of property valued in excess of $5,000 require a qualified appraisal. Marketable securities traded on a public exchange are excluded from this requirement.
Another charitable contribution option is to make a qualified charitable distribution (QCD) from an IRA. The taxpayer must be at the required minimum distribution (RMD) age, which is currently the year in which the taxpayer turns 70 and a half, to use this strategy. Taxpayers may donate up to $100,000 from their IRA, and the distribution counts towards their RMD but isn’t included in income. This allows taxpayers to keep their AGI lower, which could keep them in a lower tax bracket and/or allow more of their Social Security income to be nontaxable.
Keep in mind that all charitable contributions should have proper documentation. Cash contributions of less than $250 need to be substantiated with a canceled check or other bank record, a receipt from a qualified organization or payroll deduction record. Cash contributions greater than $250 need a receipt from the organization stating that the organization is a qualifying exempt organization, the date of the contribution, amount of the contribution and either a statement that says “no goods or services were received in exchange for the contribution” or lists the value of the goods or services received. Any noncash contribution needs to be substantiated with a receipt from the qualifying organization and, when necessary, a qualifying appraisal.
For more information on tax planning through charitable giving, reach out to your BKD trusted advisor or complete the Contact Us form below.