Almost all of us make gifts from the heart – charitable donations. Generosity and benefitting a church or charity serve as primary motivations for making charitable donations of property or money. However, you can also receive potential federal income tax savings by making such gifts.
Most charitable giving, such as donations by check to your church or alma mater, is straightforward and easy to document for your tax records. However, some types of giving are a little more complex, and you may need more information about the gift’s tax consequences before you complete your donation. IRS Publication 526 on Charitable Contributions provides a wealth of information.
COUNTRY Financial does not give tax or legal advice. You should consult your tax adviser when planning and making your gifts from the heart.
Three Conditions for Deductibility
In order for your gift to be tax deductible, you must meet some basic requirements. First, the donation must be made to a charity that has 501(c)(3) tax-exempt organization status or a religious organization. Most charities have information on their websites indicating whether they have tax-exempt status, or you can simply ask them.
Second, the donation must actually be a completed gift of property or cash. A pledge to pay is not a completed gift and, therefore, not tax-deductible.
Finally, you must be able to itemize your deductions in order to deduct charitable contributions. Generally, the deduction limitations are 50 percent of your adjusted gross income for cash contributions; 30 percent of your adjusted gross income for property contributions; and 20 percent of your adjusted gross income for appreciated capital gain assets, such as stock or real property.
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Keep Good Records
You must be able to substantiate your gift to deduct it. The record of your gift should include the name of the charity, the date of the contribution and the amount of the contribution. Keep your bank or credit card statements if your gift was made using your debit or credit card.
Many charities and churches will provide donors with written acknowledgement of their gifts. Sometimes these letters come in January in preparation for tax-filing time. You should keep all letters for your records.
Consider Creative Ways to Give
You don’t need to make all of your gifts in cash. You can also donate gently used clothing and other useful household items to certain charities that have a need for these items. Just make sure you get a receipt for each item for your records. Also, you must attach IRS Form 8283 if your total noncash contributions exceed $500.
You may also donate real property, stocks, bonds and other types of investments, as well as life insurance policies on your own life. However, some of these types of property may have a capital gain or loss, so you should consult your tax adviser prior to making such a gift. Also, seniors over age 70 ½ have the opportunity to direct a tax-free distribution up to $100,000 from their individual retirement accounts to a public charity through the end of 2013.
More complex ways to give exist for high net-worth individuals, including qualified conservation easements, split interest trusts and charitable gift annuities. However, these techniques are complex and require detailed planning with an attorney or accountant.
