You probably know that you can get an income tax deduction for a gift to a charity. But there is a lot more to charitable giving. For example, you can benefit a family member and a charity at the same time and still get a tax break.
Or you can give appreciated property to a charity without being taxed on the appreciation. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions.
Your charitable contributions can save income tax only if you itemize deductions. Once you do, the amount of your savings will vary depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes. To get a current deduction, the gift must be to a qualified organization and must not exceed certain percentage limitations. Typically, however, the limitations won’t present a problem because for public charities they will be high, 50% or 30% of adjusted gross income depending on the type of property contributed.
In contrast, the substantiation, or special proof rules, will affect many charitable contributions. Donors of charitable contributions of cash, checks or other monetary gifts must keep certain records of the gift, regardless of the amount. The donor must maintain either a bank record or a receipt, letter or other written communication from the charity that shows the name of the donee organization, the date the contribution was made, and the amount of the contribution. Appraisals are required for large gifts of property other than cash.
What about services rendered to a charity? They are not deductible but unreimbursed expenses that you incur while performing these services are deductible.
What if you get a benefit in return from the charity in exchange for making the gift? Generally, your deduction will be reduced by the value of the benefit unless the item is considered to be insubstantial in relation to your contribution.
Now for special techniques: One way to help a family member and a charity at the same time is to place cash or property in a trust, have the income from the trust be paid to your child for a set period, and then have the trust property go to a charity. Or you can set up a trust so that the charity gets the income interest and your child gets the remainder.
There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.
Please do not hesitate to contact us if you have any questions about any of the matters raised in this article.