Nothing is more rewarding than making a donation to a worthy cause-except, perhaps, donating to a worthy cause and getting a tax deduction for it.
While most donations stem from a desire to make a positive impact, there’s no denying that tax deductions are a big incentive-especially among the wealthy.
In a study of high-net-worth philanthropy by Bank of America, about 33 percent of those surveyed said tax benefits were their motivation for giving, and nearly half said they would decrease their charitable giving if tax deductions were eliminated.
However, because there are so many rules and requirements surrounding charitable giving, donors often miss out on the tax benefits they deserve. So before you make another donation, be sure you are up to date on the dos and don’ts of charitable giving to ensure your good intentions are paying off in every way.
The dos
Do make sure the organization is tax-exempt. One of the biggest mistakes people make is not making sure they’re giving to a qualified organization, said certified financial planner Stephen Aucamp, senior advisor and executive director of the Ultra-High Net Worth Group at Convergent Wealth Advisors.
“I had a situation last year where a client gave several hundred thousand dollars to an organization that she thought was a charitable organization supporting a museum,” he said.
Unfortunately, “the person she was donating to hadn’t gone through the proper steps to become a qualified charity, so she lost the deduction,” he explained.
The Internal Revenue Service has a complete list and searchable database of tax-exempt charities on its website.
Do have your paperwork in order. If you’re planning to deduct a donation, you need proof, such as a receipt, canceled check or acknowledgment letter from the charity. For text-message donations, you’ll need the phone bill with the organization’s name, contribution amount and date; for donations deducted from your paycheck, you’ll need your pay stub and donor pledge card showing proof of your gift.
If you are donating an item worth more than $5,000, you’ll also need a letter from a qualified appraiser valuing the property.
For all deductions, you must file a Form 40 with the IRS and itemize your deductions on Schedule A. If your noncash donations exceed $500, or if you’re donating items worth more than $5,000, you’ll need to include IRS Form 8283, as well.
IRA charitable rollovers in limbo
Rolling over a portion of an individual retirement account to a charitable organization is another tack donors have taken, thanks to the various tax advantages.
Although the legal provision that allowed this expired last year, experts are advising clients not to worry, as that could change.
“If you want to roll over an IRA, first you should wait and see what’s going on,” said Carol Kroch, managing director for wealth and philanthropic planning with Wilmington Trust. “The rule may get reinstated shortly.”
The provision has been reinstated and applied retroactively several times before, so there’s a good chance it could happen again, particularly as it has received a lot of support from both donors and nonprofit organizations.
Under the IRA Charitable rollover provision, if you are at least 70 1/2 years old-the age at which you’re required to begin taking and paying taxes on IRA distributions-you can choose to transfer up to $100,000 from your IRA into qualified charities.
There are several benefits to doing this: You can count the donation toward your required distribution, the withdrawal amount isn’t recognized as income, the charity doesn’t have to pay taxes on the withdrawal, and the donation doesn’t count toward your charitable contribution deduction. It also removes the money from your estate, lessening the tax bite for your heirs.-J.W.
Do understand what counts as a donation. You’re only making a donation if you’re not getting anything of equal value in return. This is particularly relevant when it comes to charity dinners and auctions.
In the case of charity dinners, you can only deduct the difference between what you paid for the meal and its fair market value, according to Carol Kroch, managing director for wealth and philanthropic planning with Wilmington Trust.
If you paid $100 and the meal is valued at $100, you haven’t actually made a donation.
The same is true with charitable auction items, she said. If you buy a $500 painting that’s valued by the charity at $500, there is nothing to deduct. However, if the painting is valued at $300 and you pay $500, then you’ve made a $200 deductible gift. Raffle tickets are never tax-deductible.
Do run the numbers. “Before you make a contribution of something large, you want to have a plan,” said Kroch, adding that your yearly tax savings will depend on a combination of factors, including your adjusted gross income, the type and value of your donations, whether you’re subject to the alternative minimum tax and the type of charity to which you’re donating.
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