By Kira Bravo
Tax Manager, Moss Adams LLP
Courtesy to the Bellingham Business Journal
As we near the holiday season, many people focus on making charitable donations to help worthy causes. When they do, they’re able to take advantage of several tax benefits—and this year offers many that may not be as advantageous in 2013 given the uncertainty of future legislative tax modifications.
Here are a few thoughts to consider as you are making your charitable donations:
– When you donate appreciated capital gain property (stock or property held for more than one year), the deduction is generally equal to the fair market value of the property. This is a great strategy for removing appreciated property from your estate, avoiding capital gains taxes, and receiving a current tax deduction.
– With some exceptions, when donating ordinary income property (inventory or stock held one year or less), your deduction is limited to your basis in the property.
– Travel expenses such as transportation, meals and lodging are deductible so long as there is not a significant element of personal pleasure resulting from the travel. Mileage is deductible at a rate of $0.14 per mile.
– Cash donations require either bank records or written acknowledgment from the charity documenting the amount and date of contribution. Those over $250 in any one day to any one organization require written substantiation from that organization.
– For noncash donations there are specific requirements for adequate documentation. As your gift increases in value, the requirements become more stringent. In some cases, you may even need to get an appraisal. You should consult a tax professional for advice to ensure you have the appropriate support for your deduction.
– If you receive a benefit from the charity as a result of your contribution (i.e. merchandise or services), then you can only deduct the amount that your donation exceeds the fair market value of the benefit you received.
– Unless Congress intervenes, higher income taxpayers will again be subject to the phase-out of some itemized deductions beginning in 2013. Charitable donations, among other currently deductible items, will be subject to the phase-out making them less advantageous for tax purposes.
– In addition to the phase-out of itemized deductions, a cap on the total amount of itemized deductions is also being debated. If such a rule were implemented, taxpayers would not be able to deduct amounts in excess of the cap. While a cap is still only being discussed, possible amounts have been suggested including $25,000 and $50,000. For taxpayers who have itemizeddeductions in excess of this amount, charitable donations would offer no tax benefit at all.
– Another possibility being discussed would allow high income taxpayers to take a deduction for charitable donations as if they were in the 28% bracket, rather than a higher tax bracket. This would diminish the tax benefit of making donations for wealthier individuals. .
– Some more complex strategies for making charitable contributions also involve trusts. These strategies can often work simultaneously as estate planning techniques for those approaching or in retirement. Two of the more common strategies involving trusts are the use of charitable remainder trusts and charitable lead trusts. These strategies require the appropriate expertise, so you should consult a professional.
There are many options when it comes to charitable giving, and with good planning, you can help a good cause and lower your family’s tax bill. When considering different strategies, you should consult a professional to ensure it fits with your overall goals.
Kira Bravo has practiced public accounting since 2006. She provides tax planning, compliance and consulting services to closely-held businesses and their owners. She can be reached at 360-685-2223 or at firstname.lastname@example.org.