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 give appreciated property to a charity without being taxed on the appreciation. Or charitable giving may be part of your overall estate planning. 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 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.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows an above-the-line deduction for non-itemizers in tax year 2020, However, unlike the provision under the CARES Act, the deduction for 2021 is claimed as deduction in calculating taxable income and not as an above-the-line deduction in calculating adjusted gross income. Individuals can take a $300 ($600 in the case of a joint return) deduction against taxable income even if they do not itemize. The contribution must be made in cash. The cash must be contributed to churches, nonprofit educational institutions, nonprofit medical institutions, public charities, or any other organization.
Under the 2017 Tax Cuts and Jobs Act, the percentage limitation on the charitable deduction contribution base is increased from 50 percent to 60 percent of an individual’s adjusted gross income for cash donations to public charities in 2018 through 2025. There is an even greater benefit, because in addition, the phase-out of allowable itemized deductions is repealed for tax years 2018 through 2025.
The income-based percentage limit is temporarily eliminated for an individual taxpayer’s cash charitable contributions to public charities, private foundations other than a supporting private foundation, and certain governmental units for 2020 and 2021. An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income. The suspended income-based percentage limit applies to qualifying cash contributions made in any tax year beginning after December 31, 2019 and before January 1, 2022. An individual may carry forward for five years any qualifying cash contributions that exceeds his or her adjusted gross income. Partners in a partnership and shareholders in an S corporation may also deduct qualified charitable contributions that do not exceed their adjusted gross income.
Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30 percent of adjusted gross income. A special limitation also applies to certain gifts of long-term capital gain property.
Taxpayers over 70 ½ years of age are allowed an exclusion from gross income for distributions from their IRA made directly to a charitable organization of up to $100,000 ($100,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.
Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. Your donations must be substantiated. 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.
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.
Contact the Crosslin tax team at (615) 320-5500 with any questions. We are here to help!