Americans are pretty generous — in fact, 83% of us donated money to charitable organizations last year, according to a Gallup survey. And now that we’re entering the holiday season, charitable giving well may be on your mind. Your key motivation for making charitable gifts, of course, is to help those organizations whose work is meaningful to you. However, by supporting these groups, you can also make life less “taxing” for yourself.
Specifically, by making charitable contributions, you may be able to receive some valuable tax breaks. To claim a deduction, though, you need to itemize your taxes, and you need to make sure that the organization you’re supporting is qualified, from a taxdeductibility standpoint. If you’re unsure whether a group is qualified, just ask to see its letter from the IRS. (Many organizations now post these letters on their websites.)
Here’s how the charitable tax deduction works: If you give $200 to a qualified charity, and you’re in the 25% tax bracket, you can deduct $200, with a tax benefit of $50, when you file your 2014 taxes. Consequently, the net “cost” of your donation is just $150 ($200 minus the $50 tax savings).
Of course, you are not confined to making cash gifts. In fact, if you donate certain types of noncash assets, you may be able to increase your tax benefits. Suppose you give $1,000 worth of stock in ABC Company to a charitable group. If you’re in the 25% bracket, you’ll be able to deduct $250 when you file your taxes. And by donating the ABC stock, you can avoid paying the capital gains taxes that would be due if you had eventually sold the stock yourself.
Keep in mind that if you want to deduct your contributions for the 2014 tax year, you’ll need to make your gifts by Dec. 31. One more reminder: Retain your paperwork. If you made gifts totaling over $250 to any single charity — or noncash contributions of any items worth over $500 — the IRS requires written acknowledgments for your contributions.
If you want to take a longer-term approach to charitable giving, while incorporating your gifts in planning for your estate, you might want to consider establishing a charitable remainder trust. Under this arrangement, you’d place some assets, such as stocks or real estate, into a trust, which could then use these assets to pay you a lifetime income stream. When you establish the trust, you may be able to receive an immediate tax deduction based on the charitable group’s “remainder interest” — the amount the charity is likely to ultimately receive. (This figure is determined by an IRS formula.) Upon your death, the trust would relinquish the remaining assets to the charitable organization you’ve named. This type of trust can be complex, so to create one, you’ll need to work with your tax and legal advisors.
While the tax benefits associated with charitable giving are significant, they should not, ultimately, drive your gifting decisions. You should also consider the effect your gift will have on the other areas of your estate considerations — so make sure you communicate your plans to your family members. In any case, though, be as generous as you can this holiday season and in the years to come. Your generosity will be a rewarding experience — for everyone.