As the end of the year approaches, charitable giving often comes to mind. Charitable giving can be enhanced using income tax deductions, and so it can be much more effective when it is included as part of your year-end tax planning.
Example(s): Assume you are considering making a charitable gift equal to the sum of $1,000 plus the income taxes you save with the charitable deduction. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).
Tax deduction for charitable gifts
If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50 percent of your AGI for the year, and other gifts to charity may be limited to 30 percent or 20 percent of your AGI. Disallowed charitable deductions may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. And be sure to retain proper substantiation of your deduction for a charitable contribution.
Year-end tax planning
If you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction in the next year when the deduction produces a greater tax benefit. Or you might push the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction. And, if the income percentage limits above are a concern in one year, you might move income into that year or move deductions out of that year, so that a larger charitable deduction is available for that year. Your tax professional can help you evaluate how to make charitable gifts in a way that is beneficial to you.
Smart ways to be charitable
Of course, there are many ways to give to charity. You can give an outright gift to an IRS-approved charity and receive an immediate income and gift tax deduction. Another way to give is to create a trust. Charitable lead trusts and charitable remainder trusts are two popular trusts used to make partial gifts to charity. If your gift is substantial, you may want to establish a foundation or donor advised fund. The costs and complexities of a private foundation make sense when you can donate enough assets to generate at least $25,000 a year for grants. Similar in some ways to a private foundation, a donor-advised fund offers an easier way for you to make a substantial gift to charity over a long period of time. As its name suggests, you can advise, but not direct, how the charitable organization distributes the fund’s money to charities.
Azzad can help you with your charitable giving needs. Call us to speak to a financial planner.
Note: For information specific to your tax situation, consult a tax advisor.