6 considerations about charitable gifts this holiday season
As 2016 comes to a close, many will consider making year-end charitable gifts as a way to give back to the community and support a good cause. For those who do it’s worthwhile to think about the tax benefits involved and make sure to take advantage of them — after all, giving back should feel good in more ways than one.
Individuals who plan on donating to charity this year should know the following:
Itemization. Only individuals who itemize their deductions on their income tax return can deduct charitable contributions. As such, the deduction is not available to those who claim the standard deduction. If you do choose to itemize deductions, you must have records to substantiate your donations. Notably, all gifts worth $250 or more require a written acknowledgment from the charity describing the gift, date, and its value.
Qualified charities. Only donations to eligible organizations are tax-deductible. The IRS maintains a searchable database on its website that is useful for verifying an organization’s eligibility to receive tax-deductible contributions. On the other hand, churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, regardless of whether they are listed in the IRS database.
Gifts of cash. Donations of money include those made in cash or by check, electronic funds transfers, credit cards, and payroll deductions. For a gift sent by mail, the envelope must be postmarked by Dec. 31 in order to be deducted on 2016 returns.
Gifts of marketable securities. Some individuals may choose to gift an appreciated long-term asset, such as stock held for more than a year. In doing so, the donor can deduct the full fair market value of the stock and also avoid paying capital gains tax on the appreciation. In contrast to the “postmark rule” above, the asset must be delivered to the charity by year-end. Because these transactions often require additional time to process, especially when mutual funds are involved, donors should not delay when making these types of year-end gifts.
IRA distributions. Donors age 70½ and above can make direct transfers of up to $100,000 annually from a traditional IRA to qualified charities. A common technique is to donate a portion or all of an individual’s required minimum distribution for the year to a charity. The amount donated is excluded from gross income. Similar to transfers of stock, these gifts also require additional processing time and must be delivered by the year-end deadline.
Post-election update. Many of the proposals for tax changes in 2017 would increase the standard deduction and lower tax rates. This may motivate some to act now instead of waiting to gift in 2017, because if such proposals are implemented a gift in 2016 may be more valuable than a gift in 2017.
While donors are motivated to give because they want to support a worthy cause, tax planning around charitable giving does not diminish this intent. A savvy donor who plans smarter will ultimately also be able to give more. Beyond donations, there are many additional ways to financially support charitable causes, such as charitable gift annuities, donor-advised funds, or charitable trusts. These are more complex than what is discussed above and involve a longer time horizon to implement, but are worthy of consideration for your 2017 financial planning.
Disclosure: This information represents the opinion of U.S. Bank. Not intended to be a forecast of future events or guarantee of future results. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness
Adam Mand and Nathan Boebel are trust officers with The Private Client Reserve of U.S. Bank, Madison.
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