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Ever since the world came into existence, there has been a clear divide between the “haves and the have-nots.” We have a world in which the rich and poor, strong and weak co-exist. Charitable Giving is the act of giving to help those in need to enhance their quality of life.
It is altruistic giving when you give without expecting anything in return. It is an act that shows the compassion and empathy of the giver.
Most of us are bogged down by the demands of our everyday lives. We are so busy sorting out our own troubles that we become oblivious to the needs of others. Charitable giving takes place when an individual is able to rise above his personal problems and donate to the needy. It is an act of kindness that helps society at large.
Many people think that charity and giving are things done by the affluent people in society. However, charitable giving is not about what or how much you give, it is more about the attitude of giving.
Charitable giving need not always be monetary donations, you can give in other ways too! You can “give” your time and efforts while working as a volunteer for a cause.
It is said that “Charity begins at home.” However, it originates in the heart when an individual feels the urge to give despite his circumstances!
What is the Purpose of Charitable Giving?
The purpose of charitable giving is a public benefit. It is done to provide support and assistance to people across the globe who find it difficult to meet their basic needs.
Charities donate to victims of wars or natural disasters like earthquakes, tsunamis, etc. Non-profits and charitable organizations also raise funds to support those in need of medical aid, food, shelter, and other fundamental needs. Charities also help weaker sections of the society, orphans, and many others.
During the pandemic situation, several charities have come forward and collected donations in cash and kind to help those in need.
In the US charitable giving is encouraged by the government also by offering tax-saving incentives to donors based on the type of charitable giving they participate in.
Let’s take a deeper look at the tax deductions associated with charitable giving:
If you are looking for tax savings through charitable giving, you must ensure that the recipient of your donation must qualify for the tax-exempt status according to the tax code as determined by the IRS (Internal Revenue Service).
For a certain type of donation, the deductible amount is calculated based on the donation. For instance, in the “quid pro quo” type of donations, the donor receives an economic benefit every time he donates a gift to a charity.
You can get a tax deduction even when you donate items like old clothes, vehicles, household items, etc. However, the donated items must be in good/running condition. Such items are usually donated to charities like the Salvation Army, etc. The tax deducted depends on the fair market value of the item being donated at the time of donation.
Tax codes may change and higher ceilings may be applicable for specific situations, for instance, recovery from a disaster, etc. In the wake of the pandemic, the ceiling for deductions for cash contributions has been increased for 2020. However, this higher ceiling is not applicable for non-cash donations.
These are some of the basic rules that can help you choose the best types of charitable giving. There are several ways in which you can donate with the tax advantage.
Here’s a List of Popular Strategies for Tax Saving Charitable Giving:
Cash Donations: It is the most straightforward way to contribute to a charity. You need to bear in mind that cash donations can get you tax deductions so make sure that you collect a receipt for your donation. Some charitable organizations may ask the donor for financial documentation like a bank statement or a canceled check. Hence, ensure that you have all the required documentation handy before you donate.
Donor-Advised Funds: In this type of giving, the donor needs to create a donor-advised fund through which he can allocate funds to charities of his choice. Donor-advised funds offer the maximum tax benefits.
Real Estate: Donating real estate to charity brings in sizable tax benefits. A donor has the option to donate his existing home to charity after his death, where the deed is transferred to the charity after the death of the donor. The estate tax for the property gets lowered by an amount equal to the value of the property.
Securities: You can consider donating appreciated securities like stocks to charities as well. This helps you save on the capitals gains tax. If you donate stocks that are over a year old and if their cost has increased, you are eligible for a deduction by an amount equivalent to their full market value.
Donating Assets: Tangible assets like art, jewelry, etc. can also be donated. Even with these donations, the donor is eligible for a tax deduction. You will need to get an independent appraisal of your assets worth $5000 and above. You qualify for a higher tax deduction when you donate an asset that is relevant to the charity. For instance, when you donate assets like relics to a historical museum, you can get a higher deduction in your taxes.
You have several options for asset donation with different types of tax benefits. For instance, donating your life insurance policy or retirement accounts, not only gets you an income tax deduction but also avoids tax liability of tax-deferred accounts. These donations can reduce your estate tax as well.
Charitable Trusts: You can establish a Charitable Lead Trust(CLT) and donate funds from the trust to a charity annually for a specified period. The tax deduction you can get for a CLT is assessed based on the income stream you generate for the charity.
Pooled Income Fund: A group of people can pool funds and securities to create a corpus. All members of the group receive cash and securities as income from this pool periodically. A specific amount is set aside for donations later. In case of the death of any member of the group, the remaining funds are donated to a charity of the donor’s choice. In this type of charitable giving, the individual is eligible for a tax deduction equivalent to the amount the recipient of charity receives.
Private Foundation: A private foundation is usually set up by people with significant assets. They may establish a charitable trust or corporation to contribute to a charity they are passionate about. It helps them establish a legacy with which their families can associate for generations. There stringent regulations for running private foundations, but the owners have complete control over how the funds are utilized. Private foundations can use funds as grants for individuals, international grants, scholarships, program investments, and many more.
If you are considering year-end strategies for charitable giving, you could itemize your deductions, and opt for any of the above charitable contributions to reduce your tax bills.
Tips to plan your charitable giving:
- Donate Long-term appreciated securities instead of cash.
- Bunching your donations is beneficial. Bunching implies concentrating all your deductions in one year and then skipping one or two years.
- Maximize your tax deductions with donor-advised funds.
- Offset tax costs involved in converting traditional IRA to a Roth IRA by choosing charitable donations.
- Asset donations help increase tax deductions.
Another important aspect of charitable giving for tax deduction is documentation.
Some of the paperwork required to be done is:
- IRS Form 1040 needs to be filed by individual taxpayers to claim tax benefits.
- IRS Form 8283 must be filed along with tax returns in case of noncash donations above $500.
- Taxpayers need to maintain a detailed record as documentary evidence for their charitable contributions throughout the year.
- Donors claiming tax deductions against cash donations are required to provide a written record, canceled check, or a bank/payroll debit.
- For contributions over $250 in cash or kind, the donor will need an acknowledgment from the recipient charity. This acknowledgment must include details such as the amount donated if any goods or services were provided to the donor along with their fair market value.
- If you are donating property or assets like art, etc. independent appraisal of their worth is mandatory.
In addition to these, other documents are required which an expert can guide you through.
So, if you are looking for ways of donating to charities while saving on your taxes, you could consider one or more of these options. It is recommended that you consult legal, tax, and financial experts.
You can make an impact with your charitable giving while enjoying some tax benefits. Choose your charities and strategist your giving so that you benefit and make a difference to the society!