Estimated reading time: 5 minutes
Trees decked with ornaments. Lighted menorahs. Egg-nog-flavored everything. The holidays are hurtling toward us.
The Toys for Tots bins and Salvation Army bell ringers are also reminders that this is the season for giving back. Donations that go beyond spare change tossed into a bright red kettle call for strategic planning, especially regarding legal and tax consequences. When you do it right, your charitable contributions can benefit the giver as well as the recipient.
Here are some thoughts on how to approach your charitable giving, now and in the future.
Which Organizations Qualify
The IRS defines the types of charitable organizations that qualify for income tax deductions. Broadly speaking, the list includes organizations formed for the public good—often called 501(c)3 organizations—religious organizations, war veterans’ associations, volunteer fire departments, and non-profit cemeteries. (Read the details in IRS Publication 526, Charitable Contributions). As discussed below, you also may give through charitable and private foundations.
Deductibility of Charitable Donations
For the 2017 tax year, as in previous years, you may deduct up to 50% of your adjusted gross income. (Donations to some kinds of organizations are limited; see IRS Publication 526 for details. Beyond 2017, the amount you will be able to deduct is part of the negotiations in Congress over tax reform.
Qualified Charitable Distributions
If you are at least 70 ½ years old, you can use your existing IRA distribution to donate directly to your favorite qualifying nonprofit. Qualified Charitable Distributions (QCD) are treated as tax-exempt, and they also count toward your annual Required Minimum Distributions (RMDs).
The maximum you can donate using QCDs is $100,000 per taxpayer. That means married couples filing jointly may donate up to $200,000.
There also are a few restrictions on the eligible charities. For example, donor-advised funds (see below) do not qualify for QCDs.
Making a QCD is simple: you direct your IRA administrator to send a check or wire transfer directly to the charity. You may also instruct your IRA administrator to make your distribution payable to the charity and deliver the check yourself. You then report the QCD on your tax return, along with your other charitable deductions, if you itemize your return. Read more about QCDs.
Cash and Property Gifts to Charitable Organizations
This is the most direct way to support the causes you care about. You may give cash or property to qualifying nonprofit organizations. If you choose this route, you may claim a deduction on your tax return. Be sure to keep receipts or bank records to back up the charitable deductions you claim. In the case of real estate or personal property donations, you may want to obtain a professional appraisal to determine the value of the donation.
Some charities and community foundations accept donations from individuals, and then distribute the money in the form of grants to one or more nonprofits, according to the donor’s instructions. Some donors like the feeling of being more in control of how their money is being used. You should be aware, however, that some donor-advised funds carry administrative costs or require a minimum donation. Do your due diligence before choosing this kind of vehicle.
Charitable Remainder Trusts and Gift Annuities
Both of these estate-planning tools allow you to give to a charity while retaining some benefit from the assets during your lifetime. In a trust, the donor receives income from the trust throughout a specified period of time, after which the trust assets are distributed to the charitable beneficiary. With an annuity, the donor and the charity split the gift, with the charity receiving the assets immediately, and the donor receiving fixed income payments over a period of time. If you are interested in either of these donation strategies, talk with your lawyer, financial planner or tax advisor.
You or your family can create your own charitable foundation to administer your contributions. While this gives you a lot of control, it can be costly to set up and maintain a private foundation. Such foundations also are governed by strict rules. Again, talking with a lawyer is a good first step.
Keeping Your Giving in the Family
In addition to giving to established nonprofits, you may want to extend the spirit of giving to your family and loved ones. This too can have tax benefits for the donor if done correctly. You may consider:
- Making cash gifts to family members. In 2017, you may give up to $14,000 to an individual (double that if you file jointly) with no tax consequences. If you plan on taking a distribution from your IRA to make such a gift, the distributions are still subject to the same taxation rules associated with the IRA. Above that amount, you must file Form 709, the Gift Tax Return.
- Paying college tuition or medical expenses directly to an educational institution or medical facility on behalf of a family member. If you do this, the $14,000 limit does not apply. And you can still give that same family a cash gift. If coming from an IRA, the same taxation rules for IRA distribution still apply.
- Contributing to a 529 Educational Savings Account for your child’s, grandchild’s or other relative’s tuition (including elementary, middle, high schools, colleges, and some vocational training institutes). Although your 529 plan contributions are not tax-deductible, the assets grow tax-deferred until distributed for qualified higher education purposes. (Distributions become taxable if they are not used for education purposes.)
Start Your Giving Now
Go ahead, give gifts for Christmas, Hanukkah, Kwanzaa, or just for the joy of giving. Then, plan your charitable contributions or the well-being of the larger community, with the understanding of how charitable giving can play to your own tax advantage.
Here’s our gift to you: A FREE consultation with an Entrust professional about using a self-directed IRA to save for retirement and education expenses, and to make QCDs.