During this time of year, and with less than a week now left in 2014, we turn our attention to another element of giving, that being charitable giving.
Two weeks ago, with Christmas almost upon us, we discussed issues and ramifications of making gifts to those we love.
During this time of year, and with less than a week now left in 2014, we turn our attention to another element of giving, that being charitable giving. Let’s tackle some issues surrounding philanthropic giving that you need to know for tax time.
Unlike making gifts to individuals, which as we said last time falls under the gift tax system, gifts to charity fall under the income tax system. Gifts of any amount to qualified charitable organizations do not require a gift tax return, but such gifts are deductible on your income tax return, subject to limitations.
Note that political contributions are not the same. They are not tax deductible (except for a very limited deduction against the Arkansas state income tax), but neither do they fall under the gift tax rules.
To get the most out of your charitable deductions, there are some things you need to know.
First, if you are inclined toward charitable giving and plan to sell stock or property that would result in long-term capital gains, you will generally be better served by actually donating the stock or property rather than making a cash donation.
This is because in general, you are allowed to deduct the full fair market value of the stock or property that has been held long term when it is donated. The tax benefit is two-fold; you get to take a deduction for the full value of the asset donated AND you do not have to pay the capital gains tax you otherwise would have to pay on the appreciation.
The tax rules state that you must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of amount. The record must show the name of the charity and the date and amount of the contribution.
Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, you should retain a pay stub, a Form W-2 wage statement or other document furnished by your employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
It is extremely important to note that donations of either money or property of $250 or more REQUIRE you to obtain an acknowledgment from the charity for the donations to be deductible. This acknowledgment must be in hand by the due date of the tax return. This is a requirement that is often overlooked until it is too late.
Also, in some cases where property is donated, a signed qualified appraisal may be required to be attached to the return in order to take the deduction for its value.
The timing of charitable gifts is also critical. Donations are deductible in the year donated, even if the check is not cashed before the end of the year. A donation by credit card qualifies, provided the transaction is completed before the end of the year. Actual payment of the credit card bill before the year ends is not necessary.
Finally, donations are only deductible if made to qualified charities. If you have any doubt about the qualified status of the charity you wish to bless, a searchable online tool is available at IRS.gov that lists most qualified charities. Also, churches, synagogues, temples, etc. are by their nature eligible to receive your deductible gifts.
Knowing these facts as you plan year-end philanthropy will make for a much more pleasant tax filing season that is right around the corner. Happy New Year to all!
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants