Making charitable donations is one way to reduce taxes. Donations can be used as tax deductions for taxpayers who choose to itemize deductions instead of taking the standard deduction. Contributions can include tangible items such as cars, plus cash and securities. There are several things to keep in mind when writing off donations to charity.A skilled tax planner can answer any specific questions that arise.
Taxpayers should only itemize deductions when it is beneficial to do so. If the standard deduction is more than the number of allowable deductions, then it is to the taxpayer's advantage to not itemize. A tax planner or preparing can assist in determining which option is the best. Deductions are itemized on Schedule A of the 1040 form and can also include medical expenses, interest on a home mortgage, and property taxes. High-income taxpayers will likely itemize deductions.
Physical goods such as cars and jewelry can be donated and used as a deduction. While not as beneficial to higher income taxpayers, this practice does allow the donor to rid themselves of unnecessary items and feel good at the same time. Many charities sell these types of donations for much-needed funds. For items worth more than five hundred dollars, the IRS requires that the taxpayer fill out form 8382. For items worth over five thousand dollars, the IRS requires that the item is appraised by a neutral party.
While many taxpayers choose to reduce their tax liability by donating cash, securities are another viable option. Donating appreciated assets can be less costly than a cash donation or donating cash from the sale of an item. Taxes on capital gains can be eliminated if stocks or other appreciated assets are given directly to a charity. This can result in higher tax deductions.
Creating a donor-advised fund offers a tax advantage and makes giving easy. These funds can be considered charitable savings accounts. The principle is simple, donated cash, stocks, or other assets are contributed, and the taxpayer immediately gets the maximum tax deduction allowed by the IRS. The taxpayer then names advisers and beneficiaries of the account. The contributions are put in an account, and the amount is invested and allowed to grow tax-free. The taxpayer can then distribute funds to the desired charities over time.
During a high-income year, a large charitable donation can be made in order to receive the IRS maximum deduction of 50% of adjusted gross income (AGI)for cash donations and 30% of AGI for appreciated securities. Remaining unused donations will carry forward for the next five years, adding to any future donations. Contributions can also offset tax from individual retirement account (IRA) conversions. Conversions from a traditional IRA account to a Roth IRA can result in a significant tax bill, but meeting certain requirements could allow charitable contributions to reduce tax due. As with any tax issue, contact a tax preparer or planner such as the Lone Star Tax Group for additional information.
Lone Star Tax Group