During the holiday season your thoughts likely turn to helping those in need by making charitable donations. Doing so will benefit your favorite organizations and help you achieve your estate planning goal of reducing the size of your taxable estate. In addition, by donating during your lifetime, rather than at death, you’ll receive an income tax deduction. But to take a 2016 deduction, you must make the gift by December 31, 2016.
Making an outright gift of cash is the most common and simple option. These gifts can include donations made via check, credit card and payroll deduction. The key is to substantiate them. To be deductible, cash donations must be:
- Supported by a canceled check, credit card receipt or written communication from the charity if they’re under $250, or
- Sub stantiated by the charity if they’re $250 or more.
Although you are entitled to a deduction for 2016 for charitable gifts made by checks that are mailed in 2016, you might be better off putting end of year gifts on your credit card (even though the 2016 charge may not be paid until 2017).
Deductions for cash gifts to public charities can’t exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to nonoperating private foundations. Contributions in excess of the applicable AGI limit can be carried forward for up to five years.
Another option is to donate appreciated publicly traded stock you’ve held more than one year. Because this is considered long-term capital gains property, it can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property. If you are considering this option, you should explore the possible creation of a donor advised fund with an organization such as the Community Foundation for Southeast Michigan. Among other things a Donor Advised Fund ("DAF") provides the following advantages
- Allow for continued involvement in making grant recommendations from the fund to any U.S.-based public charity
- Offer most of the benefits of a family foundation
- Build a family or business tradition of philanthropy
- Generate an immediate charitable income-tax deduction for gifts into the fund
- Avoid capital gains on gifts of appreciated, long-term assets
- Provide either public recognition or anonymity, whichever your client prefers
- Free donors from tax record-keeping, administrative burdens and expenses
- Avoid the private foundation investment excise tax and mandatory payout requirements
- Include professional management services and a choice of investment strategies to meet your charitable objectives
- Can be organized as a permanent or non-permanent named fund
- Can be established with a gift of $10,000 or more at the Community Foundation. Some organizations may allow the creation of a DAF with a $5,000.00 gift
Donations of long-term capital gains property are subject to tighter deduction limits — 30% of AGI for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).
If you’re planning on making charitable donations this year, please get in touch with us to learn about additional rules that may apply.