When we are making charitable donations, especially if they are larger donations of property or taxes, it can be easy to meet any necessary requirements to be able to take advantage of a tax deduction. For high earners, however, it might be important to keep in mind how much of a donation you make in a specific year, because you may end up reaching the limits of what you can deduct for the year. Consult with your tax professional or accountant, such as EB TAX CONSULTANTS in BROOKLYN, NY, who can assist you in determining the best method to make your charitable donations. Here are just a few points to keep in mind about charitable donations as a high income earner.
50% Limitation of Your AGI
The IRS sets specific limits to how much of a deduction you can take based on your adjusted gross income or AGI. Typically, you cannot deduct more than 50% of your adjusted gross income. Therefore, if you are looking to make a larger donation that may exceed that amount, you will want to consider breaking up your cash donation over a period of years to be sure to get your full deduction value from the donation. This will help you to reduce your tax liability over several years, but it also requires some financial planning on your part to be successful. Your tax professional or accountant may be able to assist you in finding the best route to achieve your goal or ideal donation.
However, if you are donating property or stocks, you may not be able to break that type of deduction up. Just remember that this may mean you will not be able to take a full deduction of your entire donation in the year you choose to donate land or other financial assets. Therefore, you will want to work with your tax professional or accountant to determine the best method to maximize your tax benefits when making larger donations to a charitable organization.
Pease Limitations on High Income Earners
If you are itemizing your deductions, you will find that a cap or phase out occurs for certain deductions as your adjusted gross income grows. This threshold typically kicks in at $309,900 for the 2015 tax year. Once that limit is reached, then your available itemized deductions are reduced by the lesser of 3% of AGI above the applicable threshold, or 80% of the amount of your itemized deductions. By working with your tax preparer, you can determine if these limits will apply to your itemized deductions for the year.
These Pease limitations apply to following types of deductions, which include charitable donations, home mortgage interest deduction, state and local tax deduction, along with a host of other miscellaneous itemized deductions. However, these limits do not apply to medical expenses, investment expenses, gambling losses and of course, certain theft and casualty losses. So work with your tax preparer to determine which deductions will fall under your Pease limits and which will not.
Other Potential Limits on Charitable Donations
Not only can these limits effect how much of a deduction you can get for your charitable donations, but it can also be effected by capital gains. When you sell any appreciated assets, such as property or stocks, you will owe capital gains tax on any appreciated profit on that property. However, if you donate that appreciated asset directly to the charity versus selling it and then donating the after gains profits, you will not have to pay the capital gains tax.
The charity could then sell the asset for the appreciated price and keep the funds without paying a tax due to their tax exempt status. Therefore, you will be able to get the benefit of the deduction without having to pay the capital gains tax yourself. So consider making a donation of the asset prior to selling it, thus avoiding a capital gains tax on any profits that you may receive.
When it comes to making charitable donations, you can have the ability to positively affect your favorite charity or worthy cause, thus making a difference in the world at large. However, the best method to complete your donation involves making sound financial planning decisions as part of the donation process.
Click on the link below to contact a tax professional or accountant in the office of EB TAX CONSULTANTS in BROOKLYN, NY, who can work with you to determine how the Pease Limitations can affect your charitable donations for the year.
ERNIE BUSTAMANTE