As the holiday season approaches, with the end of one year and the start of another, we pause to give thanks for our blessings and the people in our lives.
It is also a time when charitable giving often comes to mind. Charitable giving can be enhanced using income-tax deductions, and so it can be much more effective when it is included as part of year-end tax planning.
Example(s): Assume you are considering making a charitable gift equal to the sum of $1,000 plus the income taxes you save with the charitable deduction. With a 28 percent tax rate, you might be able to give $1,389 to charity ($1,389 multiplied by 28 percent equals $389 taxes saved). On the other hand, with a 35 percent tax rate, you might be able to give $1,538 to charity ($1,538 multiplied by 35 percent equals $538 taxes saved).
• A word of caution. Be sure to deal with recognized charities, and be wary of charities with similar sounding names. It is common for scam artists to impersonate charities using bogus websites, and through contact involving emails, telephone, social media and in-person solicitations. Check out the charity on the IRS website – www.irs.gov – using the Exempt Organizations Select Check search tool. And don’t give or send cash; contribute by check or credit card.
• Tax deduction for charitable gifts. If you itemize deductions on your income-tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction might be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50 percent of your AGI for the year, and other gifts to charity might be limited to 30 percent or 20 percent of your AGI. Disallowed charitable deductions generally might be carried over and deducted over the next five years, subject to the income percentage limits in those years. And be sure to retain proper substantiation of your deduction for a charitable contribution.
• Year-end tax planning. When considering making charitable gifts at the end of a year, it is generally useful to include them as part of your year-end tax planning. In general, taxpayers have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket.
For example, if you expect that you will be in a higher tax bracket next year, it might make sense to wait and make the charitable contribution in January so that you can take the deduction in the next year when the deduction produces a greater tax benefit. Or you might push the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction. And, if the income percentage limits above are a concern in one year, you might move income into that year or move deductions out of that year, so that a larger charitable deduction is available for that year. A financial or tax professional can help you evaluate how to make charitable gifts in a way that is beneficial to you.
If you have any questions that you would like to see answered here, send them to email@example.com or 2602 Route 176, Crystal Lake, IL 60014.
• Paula Dorion-Gray, CFP, is a registered representative of Securities America Inc., member FINRA/SIPC and president of Dorion-Gray Retirement Planning Inc.