It’s the season of giving. And scheduling your charitable donations before the year-end may be a smart way to reduce your tax bill come next April.
Yet to really leverage the most tax savings out of your giving, you need to know the IRS rules regarding reporting requirements and donation limits.
Here are some general guidelines, but double check with a tax expert before you take the plunge.
The Basics
Before you claim your deduction on Form 1040, Schedule A (PDF) next spring, make sure that your cash or property gift meets the necessary criteria for tax deductibility.
First, the cash or property in questions actually has had to change hands. A pledge or promise to donate is not deductible until you official transfer the assets.
Next, make sure your charity is a qualified tax-exempt organization. Ask the organization if it has received 501(c)(3) tax-exempt status.
Churches and other religious organizations generally aren’t required to have this status with the IRS, but if you are not sure check with a tax attorney or CPA.
Record Keeping
You are going to need to keep records such as canceled checks, acknowledgment letters from the charity, and appraisals for donated property.
Ask the charity for a receipt that includes its name of the charity, date of the contribution, and a reasonably-detailed description of the donated property.
Deduction limits
You should familiarize yourself with the deduction limits. In some cases, you might want to give a little more to fully realize the tax savings.
In others, the benefits of a big gift can be spread out over several years.
Generally speaking, you can deduct cash contributions in full up to 50% of your adjusted gross income, while property contributions are capped at roughly 30% of your adjusted gross income.
Stocks and bonds
Some investors also opt to donate stocks and bonds to a worthy cause.
The tax advantage is two-fold: You can deduct the current market value of the asset from your taxable income and don’t have to worry about paying any tax on capital appreciation that you may have accumulated.
Donations of appreciated securities are deductible at full fair market value, but only those held for at least one year and a day are eligible for a full deduction.
Keep in mind, that if you own short-term appreciated securities of less than a year, there is little or no tax difference between donating the stock or selling the stock and donating the proceeds.
If you donate stocks and bonds, you can deduct contributions up to 30% of your adjusted gross income.
Carry overs
If you exceed any of these limits, your tax deductions can be carried over to the next tax year for a maximum of five years in all.
Restrictions
The IRS doesn’t recognize all contributions as tax deductible.
On the banned list are political parties and campaigns, labor unions and business associations, for-profit schools and hospitals and foreign governments.
Again, consult with a tax attorney or CPA if you are not sure you gift qualifies for tax savings.
Ready to give?
Here’s a list of some worthy charities and a useful audio segment with Kimberly Clouse, Private Client Advocate and Chair of Covester’s Advisory Board, on the subject of charitable giving.
One more thing: Charitable giving is an intrinsically good thing to do, regardless of the tax savings.
So pat yourself on the back.
DISCLAIMER: The information contained in this article is general in nature and not intended as specific advice. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article.
