With the holiday season upon us and the end of the year approaching, 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. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered part of your year-end tax planning.
Tax deduction for charitable gifts
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. By doing so, you may also help potentially increase your gift.
Example: Assume you want to make a charitable gift of $1,000. One way to potentially enhance the gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].
However, keep in mind that the amount of your deduction may be limited to specific percentages of your adjusted gross income (AGI). For example, your deduction for cash gifts to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.
For 2021 charitable gifts, the standard rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).
Make sure to retain proper substantiation of your charitable contribution. To claim a charitable deduction for any contribution of cash, a check, or other monetary gifts, you must maintain a record of such contributions through a bank record (such as a canceled check, a bank or credit union statement, or a credit card statement) or written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
Year-end tax planning
When making charitable gifts at the end of a year, you should consider them part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time the recognition of your income so that it will be taxed at the lowest rate possible and time your deductible expenses to be claimed in years when you are in a higher tax bracket.
For example, suppose you expect to be in a higher tax bracket next year. In that case, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a more significant tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And suppose the income percentage limits above are a concern in one year. In that case, you might consider ways to shift income into that year or shift deductions out of that year so that a larger charitable deduction is available for that year. You should speak with a trusted financial advisor or tax professional to help you evaluate your individual tax situation.
A word of caution
Keep an eye out for scams. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media, and in-person solicitations. It’s essential to deal with recognized charities and be wary of charities with similar-sounding names. Check out the charity on the IRS website using the Tax Exempt Organization Search tool. Also, don’t send cash; contribute by check or credit card.
Discussing your year-end tax plan and ongoing charitable contributions with a wealth advisor to ensure you maximize the amount you can give and the amount you can deduct on your 2021 taxes is an essential part of the tax planning process. Contact us to speak with one of our experienced team of wealth professionals to ensure your year-end charitable giving plan aligns with your goals this year.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.