Your primary motivation for making a charitable donation is your generous spirit, but it is also important to know that your charitable giving may create tax benefits that make philanthropy even more appealing. Of course, there are tax rules and procedures to be followed to maximize the tax savings of your charitable donations.
Here are seven general guidelines to consider:
1. You Must Itemize
You will receive an income tax deduction in the year you make a gift to a qualified charitable organization, but you must itemize your deductions in order to claim a charitable deduction.
2. The Recipient Matters
Only gifts to qualified charitable organizations are deductible. Churches, synagogues and other religious organizations are considered de facto charitable organizations and are eligible to receive tax deductible donations.
3. Make The Most Of Donating Securities
Donating appreciated securities is among the more tax-effective ways to make a charitable gift. If you have held the appreciated security for more than one-year, you can deduct the fair market value of the donated asset and avoid the capital gain on the appreciation. Charities pay no capital gain on the sale of appreciated securities.
4. Know How Much You Can Deduct
You can only deduct as much as 50 percent of your adjusted gross income (AGI) for cash donations, or as much as 30 percent of AGI for donations of appreciated securities to charity. Any donations above these limits may be carried forward for up to five years.
5. If You’re The Right Age, Consider Direct Transfers
Individuals who are 70½ or older may have the option of making a direct transfer of up to $100,000 from a traditional IRA to a qualified charitable organization, tax free. The amount transferred to charity will not be considered a taxable IRA distribution and will satisfy required minimum distributions. Most observers expect Congress to extend this popular rule for 2015 before the end of the calendar year.
6. Consider Naming A Charity As A Beneficiary
IRA owners may name a qualified charity as designated beneficiary of some or all of a traditional IRA account, thus completely avoiding taxes on distributions from the tax-deferred account. Also, a charity may be named as the beneficiary of a life insurance policy.
7. Gifts To Charity Change Your Estate Taxes
Finally, all gifts made to charity are permanently removed from the donor’s estate and may reduce estate taxes.
So, as the year-end approaches and we reflect on the gifts we have received in our own lives, making a charitable donation to your favorite charity may be a great way to give back to the greater good, while also lowering your tax bill. Make sure you consult your accountant or financial advisor to find out what works best and applies to you.