Many of us make regular charitable donations. Whether it is cash to a religious organization or a favorite charity, or maybe clothing/household items to organizations like Purple Heart, Red Cross or the Salvation Army – most of us donate something to a non-profit organization by the end of the year.
By being charitable, we also get the benefit of deducting most, if not all of our contributions on our tax return if we itemize our deductions (a bonus for doing a good deed). For those taxpayers who are in a higher tax bracket and are getting hit with more taxes, you may want to consider setting up a Charitable Foundation account that not only allows you to continue to give to your favorite qualified charities, but will also help you maximize your allowable charitable deductions. With the current administration policies in Washington, D.C. resulting in higher taxes, it is more important than ever to find the best ways to keep our tax bill from exploding!
By opening and funding a charitable giving account, you are basically making an irrevocable contribution, which you can do with either cash or appreciated investments (i.e. mutual funds, stocks). Once the account is funded, you determine which qualified charities you give to, how much and when you want to make your donations. The main difference is you can deduct the maximum allowable contribution made to the account, even if you haven’t made the actual donation to the charity yet. Let’s look at an example:
You are filing as single on your tax return and your adjusted gross income (AGI) is $100,000. You fund a charitable giving account with $25,000 with some mutual funds that have substantial gains. When you donate appreciated investments, you can deduct up to 30% of your AGI per tax return filing ($100,000 x 30% is $30,000). So you can deduct the full $25,000 as a charitable donation on your tax return as an itemized deduction. This item alone allows you to itemize your deductions and reduces your taxable income significantly. And don’t forget, by donating appreciated securities, you also do not have to pay capital gains, like you would have if you sold the securities outright; another tax savings. Let’s say you donated $35,000 to the charitable fund, but you can only use a maximum of $30,000 as a deduction; don’t worry, you can carry forward any unallowed donations up to five years. To add to the previous example, if you were to fund the charitable account with cash, you would be allowed to deduct up to 50% of your AGI.
I recently assisted a friend with opening an account and was surprised to find how easy it was and how convenient it is for you to manage. Although there are many firms that have charitable funding accounts, I used the Fidelity Charitable Giving Account Fund (www.fidelitycharitable.org). Here are some highlights:
• Confirmation for each contribution serves as your tax receipt
• You can track all contributions and granting activities anytime on-line, however, quarterly statements are also sent to you.
• Tax form 8283 is provided to you for tax filing purposes, for all non-cash contributions of $500 or more.
• When you request to make a donation (which you can do online, by phone, fax or by mail), Fidelity automatically checks to ensure that that charity is qualified for tax purposes, and your donations can be as small as $50
• Non-donated contributions to the account can be invested in a variety of asset pools to allow your money to grow until you actually make a donation.
For someone who donates on a regular basis, this is a great way to not only donate to your favorite charities, but to also save on your taxes. I encourage those of you that are interested to check out Fidelity’s site – they make giving easy!
As a side note, for those of you who are over 70 ½ and like to donate from your IRA in order to avoid reporting some or all of your minimum required distribution (MRD) as income, it looks like the government is going to keep us in suspense again to see if they revive this law, as it expired 12/31/13. If you have been doing this, I recommend you continue with your donation from the IRA this year. The worst case scenario is that they don’t bring this rule back, and you have to report all of your MRD as taxable income, but you would be allowed to then use the contribution as an itemized deduction.
With the tax laws as they are and the unknown of more changes to come, we must be vigilant in finding ways to reduce our tax liability if we can. Good Luck!