Making a charitable contribution can benefit the giver and receiver.
It is now the month of December.
Whether you celebrate Christmas or Hanukkah, holiday preparations are well underway.
Travel is being planned, lights and decorations are going up, and treats are being baked.
You have likely started preparing gifts for your friends and family.
Perhaps you have even participated in contributing time and money to those less fortunate than yourself or a beloved organization.
Making qualified gifts to charity or charities may qualify for a deduction.
As a result, charitable giving can have tax benefits and be a wise financial move for the end of the year.
The government has various rules for giving.
Understanding whether a charitable contribution qualifies for a charitable tax deduction can help you steward your money wisely.
Charitable giving laws and IRS regulations are critical facets of estate planning for individuals and tax planning for businesses in Kansas and Missouri.
The first important question involves what qualifies as a charitable gift.
According to the IRS, charitable contributions involve a voluntary gift of property or money to a qualifying organization.
Are all charities qualified for deductible donations?
To be a qualifying organization, the charity must be recognized as legitimate by the IRS.
What makes an organization acceptable?
Generally, the organizations are registered 501(c)(3) non-profits and meet specific IRS criteria.
If the standard of IRS recognition is not met, the charitable contribution will not be eligible for a charitable tax deduction.
Before donating, you can search the IRS website to confirm the organization’s status.
The donation will not be tax deductible if you give it to specific individuals, political organizations, or political candidates.
How do tax deductions work for charitable giving?
Charitable donations may be deducted from your taxable income.
These deductions can then lead to a lower tax bill.
Income taxes have three components – tax bracket, tax rate, and tax liability.
The tax bracket governs overall tax liability and the rate of taxation.
For qualified charitable contributions to help your tax rate, you must itemize deductions on your tax returns to show your total deduction exceeds the standard deduction amount.
The IRS does place a cap on deductions.
What are the limits on charitable contribution deductions?
Rather than having a specific number for all people, the IRS bases the limits on a percentage of adjusted gross income and the type of asset donated.
Cash can generally be deducted up to 60 percent of your adjusted gross income.
Non-cash property tends to have a lower limit.
Knowing the deductions available to you can prevent future issues with the IRS.
Donations can vary in both type and means.
Some people choose to give physical assets or property to a charitable organization.
When doing so, it is essential to know the fair market value.
What is fair market value?
Fair market value is defined as the price buyers are willing to pay to a willing seller when there is no urgency or need for the transactions to take place.
How do you determine the fair market value of donated property?
The best way to do so is through an independent appraisal.
This is especially important for valuable property or items.
If an item is in good condition, it will be worth more than one with damage or flaws.
Another non-cash option for giving is a qualified charitable distribution from a retirement account.
What are qualified charitable distributions?
These are contributions made by directly transferring funds from your IRA to a qualified charity.
However, this qualified charity does not include a donor-advised fund.
Because the contributions are made with pre-tax dollars, you can use all or some of your required minimum distributions while lowering your tax liability.
You can use a donor-advised find or giving account if you want to give money periodically and provide distributions when most needed.
These accounts allow you to make an immediate donation to receive a charitable tax benefit.
You can make grants to charitable organizations immediately or wait until a future time.
Donor-advised funds have several benefits including cost savings, administrative convenience, and potential tax benefits.
Another way to give indirectly to charity is to use a charitable vehicle.
Such methods are common in estate planning through the use of trusts.
Charitable lead trusts and charitable remainder trusts provide benefits for taxes, non-profits you wish to support, receiving an income stream, and passing wealth to your heirs.
Because charitable gifts require proof for deductions, careful documentation is key.
What documentation is required for deducting a charitable contribution?
You will need a written note from the charitable organization giving the contribution date, and amount contributed when making cash donations.
A bank record may also be sufficient.
When making non-cash donations, the documentation must be more thorough — especially when the item is worth a significant amount.
Some people give in excess of their adjusted gross income limit during the year.
These individuals often ask, “Can I carry over a charitable contribution to the next tax year?
The answer is maybe.
You may find some complications with the five-year carryover rule and potential future income.
If you are feeling generous this season, remember these important factors affecting tax deductions.
The IRS must approve the organization.
Deductions have limits and require itemization on taxes.
Records of each charitable contribution should be thoroughly kept.
Working with a tax professional can help you maximize your tax benefits.
If charitable giving is a component of your estate planning, work with an experienced estate planning attorney in Overland Park or Kansas City to align your giving with your comprehensive plan.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between the Law Offices of Kyle E. Krull, P.A., and the reader.