Here are some tax implications of donations to keep in mind as you finalize your year-end charitable giving:
- Donate before year-end to claim a deduction. Please remember if you are making a stock donation to submit the request a few weeks before the end of the year as this will allow your custodian enough time to fulfill the request in time for the deadline.
- Verify that the charity is tax-exempt (sometimes called 501(c)(3) organizations) or qualified. Most organizations, other than churches and governments, must apply to the IRS to become a qualified organization. More information about qualified organizations can be found in IRS Publication 526, Charitable Contributions. You can also verify the tax-exempt status of an organization on the IRS.gov website.
- When making your donation of cash or goods be sure to get a receipt. The IRS requires a receipt for donations greater than $250. If under $250 you need to have supporting documentation such as a bank record or receipt documenting the contribution.
- For donated property with a value of more than $5,000, you’re generally required to obtain a qualified appraisal and to attach an appraisal summary to the tax return. However, a qualified appraisal isn’t required for publicly traded securities for which market quotations are readily available. For non-publicly traded securities, a written appraisal is required only when the deduction claimed exceeds $10,000.
- For gifts of art valued at $20,000 or more, you must attach a complete copy of the signed appraisal (rather than an appraisal summary) to your return.
- If you are giving a large donation and the contribution is to a “50% limit organization” (generally speaking most are), the deduction, if cash, is limited to 60% of your adjusted gross income (AGI). Non-cash contributions to a “50% limit organization” are, generally speaking, limited to 50% of AGI reduced by cash 60% contributions. When planning a large gift, talk to your tax professional to develop the most beneficial giving strategy.
- Many employers will match gifts made by their employees so remember to check your company policy and do twice as much good!
I encourage you to consider a qualified charitable distribution (QCD) or donor-advised fund (DAF) to propel your philanthropy:
- If you are over 72 then a QCD directly from your IRA may be a good option. Once you are older than 72, the IRS requires that you take a Required Minimum Distribution (RMD) from your traditional IRA. This RMD is considered normal income and is taxed as such. If you take your RMD and then make a charitable contribution, that contribution is considered a “below the line” itemized deduction and only impacts your tax bill if itemized deductions exceed the new threshold. A QCD, on the other hand, is “above the line,” removing the contribution from your RMD and reducing taxable income. Consequently, you receive the full benefit of the charitable contribution regardless of itemized deductions. The QCD returns the win-win to your charitable donation!
- Unfortunately, if you are younger than 72 then a QCD is not an option. In this case, the donation of appreciated securities is likely your best bet for a tax advantage. The use of appreciated securities allows the donor to deduct the fair market value of the donation without paying capital gains taxes on the appreciation. Not only is the inevitable capital gain avoided, but an itemized deduction is also gained if it exceeds the standard deduction, and you have contributed to charity; win-win-win! If you commit to giving annually, then the use of a DAF and charitable bunching can help you clear the hurdle of the standard deduction. Charitable bunching allows you to make several years’ worth of donations at once, greatly increasing this year’s deduction. An appreciated security is transferred to a DAF, sold and reinvested. Annual charitable gifts are then made from the fund. Due to the charitable status of the DAF, capital gains taxes are avoided and the donor utilizes the full value of the appreciated security in the year the gift is made to the DAF. And since the DAF can be invested, the size of the account has the possibility of growth, further benefiting the charities of your choice.
As you can see, the use of QCDs or DAFs can create win-win situations. Your charity of choice receives a donation and you can reduce your tax bill. Careful consideration of your personal circumstances is needed to determine which strategy is best for you. Contact your Parsec advisor to discuss the options.
For more, read our whitepaper Charitable Gifting Strategies to Maximize Income Tax Benefits.
Andrew Small, CPA 
