Your savings and assets are primarily meant to support you in retirement. But, the wealth you’ve acquired over a long career can also be used to help support your community through charitable gifts. Many retirees choose to give back by making donations in the form of cash, direct transfers from an IRA or stock shares.
In addition to the satisfaction of helping those in need, charitable gifts can offer donors certain financial benefits. Namely, tax deductions. Of course, as with anything that involves the IRS and the movement of one’s assets, there are potential pitfalls.
Here are some important things to know about charitable gifts to avoid common pitfalls and maximize your tax savings.
Why you should ask for a receipt
When it comes to giving charitable gifts in excess of $250, a paper trail is required. You need a receipt. Unlike for smaller gifts, a bank record, canceled check or written communication from the charity is not sufficient. Still, it’s recommended to obtain receipts for smaller gifts as well.
Along with information about the contribution, the receipt (or “written acknowledgement”) must provide a description and value of any goods or services you received from the charity in exchange for your contribution. For example, a fundraising dinner event where some of the funds received from the donor pays for the actual dinner, while the rest is a donation.
The IRS also states that the receipt must be contemporaneous with the donation, meaning it must be provided around the same time. Specifically, you must receive the receipt by the earlier of the date you file your federal income tax return for the year of the contribution, or the due date (including extensions) of the return.
If you don’t get a proper receipt, you may be billed for the deduction including interest and a 20% penalty.
What makes a qualified charitable distribution from an IRA qualified
The shrewdly named Protecting Americans from Tax Hikes Act of 2015 created a permanent provision allowing IRA owners who are 70 ½ or older to transfer up to $100,000 a year directly from their IRA to charity. That transfer is excluded from the IRA owner’s income and, if done correctly, counts toward the owner’s required minimum distribution.
The key is that the distribution is directly transferred to the charity. That means, if the IRA custodian makes a check payable to the IRA owner who then endorses the check to a charity, it is not qualified.
Donating stock can be a waiting game
Donating publicly traded shares that have increased in value can provide big tax savings. But, to maximize those savings can be tricky.
The first thing to know is that for shares you’ve owned for at least a year and a day, you can deduct the full value – both the price you paid and any appreciation – without reporting the gain as income. This charitable deduction can offset other earned income you report.
For shares held for less than a year and a day, you are only allowed to deduct the price you paid and not any of the appreciation.
Your deduction is based on the midpoint between the shares’ high and low market prices on the day of your donation.
Also, appreciating shares in your portfolio isn’t the only place to find tax savings. If you own shares that have lost value, you can sell them to create a tax-deductible loss, and then donate the cash received.
A famous saying, commonly attributed to Clare Booth Luce, states: "No good deed goes unpunished." That can be true if you don’t understand the rules governing charitable gifts. To maximize your tax deductions and avoid unnecessary mistakes, you have to do it right. Therefore, ask a financial adviser and a tax professional to help you appropriately donate large gifts and fill out the necessary tax forms.