By Charlestien Harris
The Tuesday after Thanksgiving is commonly known as Giving Tuesday. It is when many people choose to make charitable donations to qualified organizations. People making charitable donations for Giving Tuesday, or at any time during the year, should review whether their gift is tax-deductible. Some donations to charities may be deductible, but if you are not sure, you should check with the IRS for clarification.
There is a plus side to giving on the Tuesday after Thanksgiving, and that could be in the form of a tax benefit. Let’s look at how giving to charities or qualified organizations at the end of the year can benefit you during the coming tax season.
- It can reduce your taxable income. By using proper tax planning strategies, charitable contributions can reduce three kinds of federal taxes: income, capital gains, and estate taxes. Donations to 501(c)(3) public charities qualify for an itemized deduction from income. Cash contributions include those made by check, credit card, or debit card, as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization.
- Cash or property donations worth more than $250 should be properly documented. The IRS requires you to get a written letter of acknowledgment from the charity. It must include the amount of cash you donated, whether you received anything from the charity in exchange for your donation, and an estimate of the value of those goods and services. You must receive a letter of acknowledgment by the date you file your taxes for the year you made the contribution and itemize the donation on your tax return.
- Reduce capital gains taxes. You can use charitable contributions to reduce your capital gains tax liability by donating long-term appreciated assets. A long-term appreciated asset is defined as an investment or physical property that has increased in value over time and has been held for more than one year. Not only can you deduct the fair market value of what you give from your income taxes, but you can also minimize capital gains tax of up to 20 percent, according to Fidelity Charitable. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded and non-publicly traded.
- Lower estate tax. The federal estate tax is a tax on the transfer of your property at your death. Giving assets from your taxable estate to reduce your chance of being subject to the estate tax is considered a tax benefit if it is executed properly. You should consult a tax planning professional for credible advice on how to strategize when it comes to estate planning. Charitable tax strategies for estate planning purposes can be among the most complex, and it typically makes sense to consult a professional. Commonly used strategies include the use of charitable trusts and careful selection of assets for distribution to various beneficiaries—charitable and otherwise.
- Don’t miss out on tax deductions for volunteering. IRS rules don’t let you deduct the value of your time or service, but you can deduct expenses related to volunteering for a qualified organization, and these can be counted as tax-deductible donations. The expenses must be directly and solely connected to the volunteer work you did; not previously reimbursed; and not personal, living, or family expenses. Your tax-deductible donations can include mileage you drive to charitable events and volunteer opportunities, or mileage you used to bring items to a donation site. You can either deduct your actual expenses using receipts for gas and similar costs, or you can take the standard mileage deduction. Keep your receipts if you plan to deduct your actual expenses; you may need them if you’re audited.
It can be quite advantageous to create a charitable tax plan to reap the tax benefits at the end of the year. To create a strong charitable tax plan that helps you to prepare for strategic giving while providing the most tax benefits, you should take into account such factors as what assets you have that are available to give, the tax deduction goal you have in mind, and what questions every taxpayer and advisor should address. The IRS has certain rules you must follow. You can go to the IRS website: IRS Giving Tuesday. Involving a tax professional can be critical when deciding how you are going to give to a charitable organization when it comes to reducing your taxable income, lowering your estate tax, or reducing your capital gain tax.
For more information on this or other financial topics, you can email me at Charlestien.Harris@banksouthern.com or call me at 662-624-5776.
Until next week – stay financially fit!