5 Tips for Year-End Charitable Giving

The last quarter of the year is the time to think about charitable giving and the tax ramifications. Here are five tips to help you.

1.     Check the organization

You can make tax-deductible contributions only if the organization is IRS approved. The IRS’ Exempt Organizations Select Check, which includes Publication 78, is an online way to check whether the organization is eligible to accept tax-deductible contributions.

But you may want to check further to determine whether an organization is using your money for its charitable purpose. Charity Navigator uses a four-star rating system to help you decide whether you want to direct your contributions toward a particular organization. You’ll also find a donor advisory, which is a list of organizations with questionable reporting and leadership (e.g., an organization under investigation by a state attorney general) that you want to avoid.

2.     Do the paperwork

When you make any contribution, be sure you have the necessary substantiation to meet tax law requirements so you can take a deduction. For example, if your donation is $250 or more, you need a written acknowledgment from the organization. But even if your donation is $100, you still need proof that you made the contribution.

For property donations, determine whether appraisals are needed and that you obtain them from qualified appraisers only.

3.     Know the timing for year-end donations

You can make year-end donations up to midnight on December 31. For example, you can:

• Put a check in the mail before January 1. As long as it is received in the normal course of business and there are sufficient funds to cover the amount of the donation, you take the deduction in the year you mailed the donation; not the year in which it was cashed.
• Charge a donation online before January 1. The donation is deductible in the year you charged it, not the year in which you paid the credit card bill.

However, if you own stock that you want to donate, leave sufficient time for the stock’s transfer agent to retitle the shares. The same is true for donations of mutual fund shares; this type of donation can take weeks to finalize, so start early.

4.     Recognize your limitations

While your charitable activities may not be motivated by tax savings but rather by doing good, don’t ignore the tax law limitations that may restrict the tax breaks for your generosity.

• You must itemize to deduct charitable contributions. If you take the standard deduction, you cannot get any tax benefit from your donations (except for a special IRA rule described later).
• You can only deduct contribution amounts up to a percentage of adjusted gross income (AGI). For example, cash contributions cannot exceed 50% of AGI; excess amounts can be carried forward for up to five years.
• If you are a high-income taxpayer, part of your deduction is phased out. The part that is phased out is lost forever; it is not carried forward.

5.     Watch for a donation option for nonitemizers

If you are at least 70½ years old by the end of the year, you can transfer up to $100,000 from your IRA to a public charity if this tax rule is extended for 2015 (as it is expected to be). While no deduction is taken for this type of contribution, it provides substantial tax breaks nonetheless:

• It is not included in gross income. This minimizes your AGI, which not only directly reduces your tax bill because you have less income to be taxed, but also indirectly helps to cut your tax liability. A lower AGI means greater eligibility for various tax breaks that can save you money. It can also cut your Medicare Parts B and D premiums two years from now (2017 premiums are based on 2015 modified AGI).
• It can be used to satisfy your required minimum distribution (RMD) for the year. Thus, if you were supposed to take $5,700 as your RMD for 2015 and instead you direct your IRA custodian to transfer it to the American Red Cross, you’ve met your RMD obligation for the year.

Monitor activity in Congress to know whether this option is available. If you’d like to use this tax break, hold off on taking your 2015 RMD until later this year when Congress is expected to extend this option. However, if you wait, keep in mind that the transfer may have to be completed by the end of the year to qualify. If an extension is enacted close to the end of the year, Congress may or may not allow transfers made after the end of the year to qualify for the tax break.

Conclusion

Giving to charity is an admirable activity. Be sure that you fully understand what your donations mean from a tax perspective.