Anne Frank’s words could not be closer to the truth, especially from a tax point of view. Of course, getting a tax deduction is just a small benefit compared to the satisfaction we receive when we give from the heart.
This is the time of year my clients call to ask for suggestions on how to minimize their looming tax liability. They usually start the conversation with, “I have a quick tax question,” and then I follow up with my not-so-quick list of questions. First, I make sure that they’ve utilized their 401(k), contributed to their HSA/FSA (health and flex spending accounts), liquidated their non-performing stocks, and asked that their employer bonus be held over until January. Then I tell them that the alternatives are to increase their charitable giving or to increase the taxes being withheld from their paycheck. Most people, of course, decide to up their charitable giving!
Itemized deductions are your first line of defense against your individual tax bracket, because they lower your taxable income. The tax benefit of charitable giving, however, is different for each individual. For the 2014 tax year, deductibility will be decided by adjusted gross income (AGI). Cash and non-cash donations are counted as itemized deductions. But beginning in 2013, the itemized deductions are subject to limitations for high income earners: for people with incomes of $300,000 (married filing jointly) or $250,000 (single), the itemized deductions will be limited to 3 percent of the income above those thresholds. If your AGI does not exceed the thresholds, your itemized deductions won’t be affected.
In case this sounds like Greek to you, here’s an example of how the limitations on itemized deductions work: A married couple’s AGI is $390,000. Their itemized deductions total $55,000 ($35,000 of mortgage interest/property taxes and $20,000 of charitable contributions). Their income is $90,000 over the threshold of $300,000, and $90,000 x .03 percent = $2,700. So, their allowed itemized deduction will be $52,300 ($55,000 minus $2,700). Although their itemized deductions are slightly limited, they will still get major tax relief from charitable giving. Even if the couple chooses not to make the $20,000 charitable donation, their itemized deductions will still be limited by $2,700—leaving them with a much smaller $32,300 (instead of a $52,300) deduction to their taxable income.
Another change that took place in 2013 was the addition of a new tax bracket for high income earners. In the past, 35 percent was the highest tax bracket. Now, for those with AGIs over $400,000 ($450,000 married filing jointly) the highest tax rate is 39.6 percent. Even with the limitations, though, the tax benefit of charitable giving will still help ease the bite of the new higher tax rate.
Please note, in rare cases, a high-income taxpayer ($1 million+) with minimal itemized deductions may not benefit from any additional itemized deductions.
Clients often ask me if there’s a yearly limit for charitable deductions. My answer is that you can deduct charitable contributions up to 50 percent of your income (keeping in mind how the limitations I mentioned play into the deduction). If you give more than 50 percent of your income, the additional amount above 50 percent will be carried forward to the next tax year.
In order to receive credit for your 2014 giving, remember the following:
Your donation has be dated or postmarked on or before December 31, 2014, regardless of when the check is cashed by the charity.
To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records, or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
For text message donations, a telephone bill is sufficient if it shows the name of the receiving organization, the date of the contribution, and the amount given.
- And of course, the charity has to be a qualified organization, so it is important to know who you are donating to in order to receive credit for your giving.
As so many financial planners will tell you, it’s wise to diversify your investments. And with so much of our money going to taxes, it makes sense to give some of that money to those who are in need. As John Bunyan, the writer of Pilgrim’s Progress said:
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