As the year end nears, this is a good time to review your charitable gifts to obtain maximum tax benefits. These are a few of the things to keep in mind:
2014 or 2015?
Consider your expected marginal tax rate for this year and next to help decide when to time the gift. For example, if you have a pledge that must be satisfied by 2015, consider making the contribution in 2014 to speed up the deduction if you anticipate a drop in income and a lower tax rate in 2015.
Conversely, it may make sense to delay a planned 2014 contribution to January 2015 if you have relative certainty that your 2015 tax rate will be higher than 2014.
Cash or Securities?
When making sizable charitable contributions, it is usually advisable to make the donation using appreciated capital gain property, such as marketable securities, rather than cash. If the property has been held for more than one year, you will obtain a deduction for the full market value of the security while any income tax on the gain will be avoided. A few cautions: first, deductions for gifts of appreciated property are limited to 30% of adjusted gross income (AGI) rather than the 50% limit for most charitable contributions; second, any tangible property gifted (i.e. art) must be used in the charity’s exempt purpose (i.e. an art gallery) to get this treatment; and third, only gifts of publicly traded securities will qualify when the gift is to a private foundation.
Credit Card Gifting
An increasing amount of charitable giving is being driven to websites which accept credit cards for payment. The general rule is that a charitable contribution is deductible in the year it is paid. For gifts by credit card this is the date you charge the gift, not the later date when you pay the credit card company. Another caveat for credit card gifting is to make sure you obtain the required documentation (discussed below). The line item description of the charge on your credit card statement may not be sufficient to ensure your deduction.
IRA Distributions to Charity
In 2013 and prior years, taxpayers over the age of 70 ½ had an opportunity to use IRA distributions to make direct charitable contributions. Unfortunately, this provision expired at the end of 2013. There remains a remote possibility the rule will be reinstated before the end of 2014. If so, we will advise of this opportunity where applicable.
Documentation
A final reminder is that all charitable contributions must be supported by evidence the gift was made and gifts over $250 must be supported by a receipt from the charity that received the gift. A thank you letter is not enough. The receipt must specifically state no goods or services were received in exchange for the gift. Absent this crucial language no income tax deduction is allowed. You also must have obtained the required documentation by the time you file your tax return for the year of the gift. Waiting until the IRS audit letter comes in the mail is too late.
For volunteers, no tax deduction is allowed for your time or the services you perform for charity, but you may still be entitled to some breaks. You can deduct the expense of using of your automobile while performing services for a charity. The easiest method is to deduct $0.14 per mile plus parking and tolls. If you incur other out of pocket costs make sure you maintain detailed records, if the total exceeds $250 you’ll need to submit a statement of expenses and receive an acknowledgement of the total in writing from the charity.
Summary
Your generosity in gifting time and money to worthwhile causes can have a significant impact on your tax liability. While tax considerations should never drive your charitable giving, it certainly doesn’t hurt to structure your gifting to maximize the tax benefits. If you have questions regarding your gifting plan, please contact your Moneta advisor or Tax Strategies.
