Charitable Giving and the IRS – What You Need to Know
November 17, 2017, by Roger Ingwersen
Citizens of the United States are some of the most generous people in the world, and have demonstrated a long history of helping those less fortunate. Today, this is reflected in the sheer volume of donations that are made annually in the name of charity across the country.
Americans’ propensity to give was demonstrated recently in the catastrophic hurricane that hit Houston, Texas. Just look at how quickly J. J. Watt of the Houston Texans raised $37,000,000 for those negatively affected by Hurricane Harvey. Mr. Watt was hoping to raise $200,000. He would go on to raise more than ten times that amount from over 200,000 donors!
Although Americans have long had a charitable inclination, part of the reason we give so much is because we are encouraged to do so by our government. Any money given to an accredited charity is a tax deduction on your personal and business tax return. So, when tax season comes, you’ll be glad you helped a good cause, whatever it may be.
However, the tax aspect makes how you give – or more importantly, what you give – an important decision. In other words, there is a right way to give, and a wrong way to give.
For example, you can write a check for $1,000 to the American Red Cross or you can gift a highly appreciated security. If you own Amazon stock that is worth $1,000, but you only paid $100 for it, you will get ample return during tax season. That’s because giving the $1,000 worth of Amazon stock will translate into a $1,000 tax deduction.
That’s not a bad deal for a gift that only cost you $100. This is what we call a win-win all the way around. And we have the IRS code to thank.
A lessor known gifting strategy works for someone who is over the age of 70 1/2 and is required to take a Required Minimum Distribution (RMD) for their IRA.
Let’s assume that this person does not need the income that he is required to take and that he is charitably inclined. You need to be careful how you make this gift from your IRA in order for it to work correctly. The Protecting Americans from Tax Hikes Act of 2015 made qualified charitable distributions (QCDs) permanent.
Only IRA owners and beneficiaries age 70 ½ or older can make QCDs. The IRA funds must be paid directly from the IRA to the charity. The QCD counts towards the year’s annual RMD. No taxable income is reportable by the IRA participant, and no charitable deduction may be claimed.
Again, thanks to the charity of the IRS tax code, an IRA owner who is over the age of 70 ½ can avoid reporting tax on his RMD while making a charitable contribution. Once again, this is another win-win all the way around.
“Clearly, the gift of appreciated assets and the use of qualified charitable distributions are terrific tax planning strategies,” says Ed Suleski, CPA, co-managing partner of the CPA firm Rogers, Suleski & Associates, LLC in Needham, MA. “QCDs also have two indirect tax savings that may benefit taxpayers. If a taxpayer’s itemized deductions are below the standard deduction, a typical charitable contribution may be lost. The QCD effectively allows that deduction by directly reducing taxable retirement income, regardless of itemized deductions. In addition, the QCD reduces a taxpayer’s Adjusted Gross Income, which is the basis from which certain itemized deductions (e.g., medical expenses) can be limited under the tax code”.
For a list of accredited charities and foundations, one place to go is: www.guidestar.org.