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.
Under the OBBBA, the increased contribution limitation for cash gifts made to qualified charities is permanently extended. For tax years after 2017, the percentage limitation on the charitable deduction contribution for cash donations to public charities is 60 percent.
In addition, the deduction for taxpayers who elect not to itemize is expanded and permanently reinstated. Specifically, for tax years after December 31, 2025, non-itemizing taxpayers can claim a deduction as an adjustment to Adjusted Gross Income (AGI) of up to $1,000 for single filers ($2,000 for married filing jointly) for certain charitable contributions.
The OBBBA also creates a 0.5 percent floor on charitable contributions for taxpayers who elect to itemize on their returns for tax years after December 31, 2025. Taxpayers must reduce the amount of their charitable contributions for the tax year by 0.5 percent of the taxpayer’s contribution base for that year.
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 $111,000 ($111,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.
Substantiation. 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.
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Please do not hesitate to contact us if you have any questions about any of these matters.
