Help the causes you care about & help your finances in the process.
An opportunity for you to give & save. As 2013 ends, you may be considering making one or more charitable gifts. In most instances, they are tax-deductible with benefits for the donor as well as the recipient.
As you make any charitable gift, keep three things in mind. One, the organization must be a qualified charity. An Internal Revenue Service letter certifies this status. Some charities post such letters on their websites; others don’t, but will produce one for you if there is any question in your mind. You can check up on a charity yourself at www.irs.gov, using the IRS Exempt Organizations Select Check. (For the record, the IRS considers churches, mosques, temples and others houses of worship de facto charities; they may not be on the Select Check list, but they are eligible to receive charitable gifts. If there is any question at all, simply ask.)
Two, remember that charitable contributions are only deductible if itemized on Form 1040, Schedule A (lines 16-19). They are deductible in the tax year that they are made.
Three, you will want a receipt or some form of bank record – a credit card receipt, a canceled check – plainly denoting the name of the charity and the date and amount of the donation. You don’t have to file these receipts with your 1040, but you should have them in case of an audit. The IRS now requires written evidence of cash donations to charities, regardless of amount.
How should you contribute? There are a few popular options.
You could make a cash gift. The potential tax savings depends on your tax bracket. For example, if you write a check for $10,000 to a qualified charity, you could save $3,500 in taxes if you are in the 35% bracket and $1,500 if you are in the 15% bracket.
Can you make a “cash” donation with a credit card? Of course – and as long as the charge is captured by the end of 2013, the donation is deductible for 2013. If you write a check dated in 2013 and mail it before January 1, that contribution will be deductible for 2013 even if it isn’t cashed until next year.
You could donate appreciated stock. In this bull market, many investors hold stocks and funds with major unrealized gains in taxable accounts. If you have owned stock (or other appreciated assets) for more than a year, you can donate that stock to charity and take a deduction equal to its fair market value while avoiding the capital gains tax you would incur by selling it.
An example: you are in the 33% federal tax bracket, and instead of writing a $10,000 check to a charity, you gift $10,000 in appreciated stock you purchased years ago. Let’s say the fair market value is $10,000 and the cost basis is $2,000. Under this scenario, your gift offers you a route to $3,300 in income tax savings plus an opportunity to avoid $1,200 of capital gains tax and $304 of Medicare surtax on net investment income.
An important note: if you gift property worth more than $5,000 to a qualified charity, you are required to get a qualified appraisal of that property’s fair market value. This applies to myriad forms of non-cash property, not just appreciated securities. You must also fill out Form 8283. (See irs.gov/taxtopics/tc506.html for additional requirements on non-cash charitable gifts.)
You could make a charitable IRA gift. To some traditional IRA owners, the annual Required Minimum Distribution is an annual financial nuisance – an unwanted chunk of taxable income. If you feel this way, and have put off your RMD until the last minute (more or less), you may have an alternative.
If you turned 70½ this year (or were already older than 70½ when 2013 started), there may still be time for you to arrange a charitable IRA rollover before the year ends. You may donate up to $100,000 of IRA assets to a qualified charity through a trustee-to-trustee transfer arranged by the IRA custodian. (That is, the money cannot pass through the donor’s hands.) The gifted assets must be transferred before the end of 2013. There is no resulting federal income tax deduction, but the distribution of IRA assets to charity can count toward the annual IRA withdrawal requirement and isn’t included in the donor’s adjusted gross income. Your IRA custodian must send you a 1099-R in January reporting the gift.
Finally, some fine print. There are some limits to annual charitable gifting, especially if your charitable contributions exceed 20% of your adjusted gross income. Should that occur, you may find that you can only deduct cash contributions up to 50% of your AGI. Similarly, you may also only be able to deduct non-cash assets up to 30% of AGI and appreciated capital gains assets up to 20% of AGI. Should you exceed those limits, you can carry the deduction forward for up to five years. In addition, single filers with AGI above $250,000 and married joint filers with AGI above $300,000 face losing a portion of their itemized deductions in 2013.
Your personal financial consultant – Monty