You probably know that you can get an income tax deduction for a gift to a charity if you itemize your deductions. But there is a lot more to charitable giving. For example, you may be able to indirectly benefit a family member and a charity at the same time and still get a tax break. Or you may be able give appreciated property to a charity without being taxed on the appreciation. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. We would like to take the opportunity to introduce you to some of these requirements and tax saving techniques.
First, let’s take a look at the basics: Your charitable contributions can help minimize your tax bill only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes. To get a current deduction, the charitable gift must be to a qualified organization and must not exceed certain percentage limitations.
You also need to substantiate your donations. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation. However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.
The amount of otherwise allowable itemized deductions is reduced for higher income taxpayers whose adjusted gross income exceeds certain threshold amounts. For 2017, the threshold amounts are $313,800 in the case of married taxpayers filing a joint return or a surviving spouse, $287,650 in the case of a head of household taxpayer, $261,500 in the case of an unmarried individual, and $156,900 in the case of married taxpayers filing separate returns. A taxpayer with AGI over the threshold amount must reduce their otherwise allowable itemized deductions by the lesser of: three percent of the amount of the taxpayer's AGI in excess of the applicable threshold amount, as adjusted for inflation, or 80 percent of the itemized deductions otherwise allowable for the tax year.
Now a word about special gift-giving techniques: There are some strategies that can help minimize your tax liability. Making a gift to another individual outside of the umbrella of a charitable organization is one. For example, you can give up to $14,000 in 2017 tax-free to another individual or $28,000 for married couples making joint gifts. If larger gifts are made, use of a lifetime gift and estate tax exclusion, set at $5.49 million for 2017, might be considered. However, you need to be very careful and rely on professional help. There are a lot of scams and schemes that really push the envelope. The IRS is aware of these abusive practices and is cracking down on taxpayers who use them. If a scheme sounds too good to be true, it probably is!
There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.
IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, information contained in this article is not intended by TOPC Potentia P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.