We all admire people who live the credo, "it's better to give than receive," but it might be even better to give and receive - especially when you can afford it and get the biggest tax benefit. By planning and budgeting your charitable donations just as you do your discretionary spending and saving, you can ultimately be more generous over your lifetime (and after). So consider replacing a hit-and-miss donation approach with charitable-giving tactics and strategies that could improve your financial planning. (To read more on giving, see Encouraging Good Habits With An Incentive Trust.)
To ensure a future generation of givers, it is never too early for families and society to cultivate children's generous and charitable impulses. Yet that runs smack into conflict with an even stronger nurturing need in the consumer-driven, debt-plagued United States - the savings vs. investing impulse. Young people can learn to reconcile the two by investing in both themselves and their communities with these allocations:
- Charitable Sweat Equity: Devote a lot of youthful energy to doing charitable work, while giving a limited amount of funds to a few just causes. Get those donations from the amount otherwise spent for discretionary purposes. Contribute more as discretionary income increases.
- Bigger Charity Spending by Bigger Earners: Embrace the goal of making and saving enough to devote the bulk of the (more limited) adult energy to earning money. Then you could spend a bigger share of those earnings toward donations , yielding much larger tax savings than the same donations made when earning lesser wages.
Once you're in a tax bracket that will give you a decent return on donations, you will still want to be selective and focus your financial resources on home ownership, possible family formation, paying back student loans or credit-card balances, and long-term saving. (To read more about savings in this age bracket, see Competing Priorities: Too Many Choices, Too Few Dollars.)
You also want to be sure you follow the rules so that you'll be able to easily and rapidly justify your donations should the IRS ever question them. Here are some guidelines:
- Preplan Your Charity Budget: Decide each December what your following year's donation total will be, and allocate specific amounts from that to a limited number of preferred charities. This will also keep you from getting on too many lists for repeated appeals. But leave some funds unallocated to donate for causes you don't know about in advance, such as emergency disaster appeals, or sponsoring a friend who is running a race. Adjust upward accordingly if things go better than expected financially that year.
- Sweep Away Street Solicitations: It's hard to walk away when someone's tugging your heartstrings, but they might represent dubious organizations that isn't registered for IRS purposes..
- Relish Receipts: For 2007, legislation now requires that all claimed cash donations have receipts or canceled checks that you can produce in an audit. (For related reading, see Surviving The IRS Audit.)
- Say No to Propped-Up Value: Similarly, starting in 2007, non-cash material contributions of clothing, furniture and similar items must be in "good or better condition" and valued strictly - such as the amount you'd expect the item to sell for in a low-margin thrift store or consignment shop. However, items worth more than $500, regardless of condition, can be claimed if you include a professional appraisal with your tax return.
If you have plenty of money to go around, then give generously now if you wish. You can still maximize the cumulative amount you'll be able to give for the rest of your life by careful planning in light of these tax facts and rules:
- Outer Limits: Giving 50% of your adjusted gross income (AGI) might seem like science fiction, but if you and society are lucky enough that you can afford doing it, that's the annual deductible limit. Furthermore, the total amount you can give to certain non-public charities, such as private foundations, is limited to 30% of AGI. (To read the full rules, see IRS Publication 526.) However, contributions that exceed those limits can be deducted over the next five tax years.
- Maximum/Minimum Limit(ed) Hassle: Do you want to donate more but face an alternative minimum tax (AMT) hit, an unneeded mandatory required minimum distribution (RMD), or an AGI-limit limited-deduction limitation? Consider taking advantage of a tax-free, limited-time deduction for distribution donations made directly from your Traditional IRA to qualified charitable organizations. While potential benefits are substantial, the rules involved are complex; so consult a tax expert before acting. (To learn more, see Cut Your Alternative Minimum Tax.)
- Unlock Stock and Barrel: If you're considering a big gift and have sizable paper long-term capital gains on winning stocks you've held for at least a year, get a double benefit by donating them instead of selling. Claim a full deduction for their current market value, pay the capital-gains tax and then donate only the diminished proceeds. However, you can only deduct such stock gifts up to 30% of your AGI, even if they're made to a public charity. (To read more see, Can I donate stock to charity?)
- Know A Benefit's Self-Benefit: When a donation mixes charity with entertainment or something else with tangible worth, such as a benefit banquet for a worthy cause, you're entitled only to the net of your donation after subtracting the entertainment or tangible value. Similarly, purchasing products sold for a cause, such as Scout cookies, or given as a premium for a donation, are limited to the net of your purchase or donation that actually benefits the charity. Make sure that your donation receipt indicates that value. However, you're allowed full donation value when you get only incidental premiums such as t-shirts or coffee cups.
In general, these gifts also reduce your taxable estate, lowering ultimate estate taxes in a manner equivalent to charitable gifts made upon death from by a trust or will. As a result, donating before you die may have more tax benefits than upon-death gifts, which don't reduce income taxes. (To keep reading on this subject, see Get Ready For The Estate Tax Phase-Out and Three Documents You Shouldn't Do Without.)
By adopting this early penny-pinching, anti-personal-poverty plan and later generously funding societal anti-poverty programs, you'll be taking best advantage of these tax facts and rules:
- No Reduced Taxation Without Contribution Itemization: If you don't own a mortgaged home - with which you'd be able to deduct mortgage interest and property taxes - you're unlikely to accrue enough deductions to itemize. (Keep reading about this subject in A Tax Primer For Homeowners.)
- Low-Bracket Anti-Deduction Racket: If you can itemize charitable deductions but your taxable income pushes you into a 25% or higher bracket, the most you'll be able to save is $0.15 in taxes for every dollar you contribute. Donors who earn several-hundred thousand dollars a year reduce taxes by a dollar for every three they donate.
- Charitable-Contribution Deferral with a Roth IRA: Amounts put into a Roth IRA can be withdrawn at any time without taxes or penalties. Meanwhile, they generate tax-free earnings that must remain in the account - generally until age 59.5. Furthermore, individuals can contribute a total of up to $4,000 annually - disbursed among any number of Roth accounts they choose to establish. Taken together, these rules make the Roth a perfect place to squirrel away a charitable-donation reserve. (Read more on this subject with Gifting Your Retirement Assets To Charity and Taking Penalty-Free Withdrawals From Your IRA.)
Sure, charities have unlimited and immediate needs, but to best help yourself and society in the long run, wait to donate until you get a worthwhile tax benefit. Instead, set up a designated Roth IRA account where you can put amounts you intend to donate when you can itemize them and are in a high-enough tax bracket. Put the rest of your long-term savings into a different Roth from which you'll never make withdrawals until retirement.
Meanwhile, you'll be adding to those long-term savings with earnings - from the pre-donation principal - that continue to grow in the Roth after the principal is withdrawn and donated. Ultimately, you'll be more prosperous and able to donate more total money during your life or at death. (To learn more about deductions, see Deducting Your Donations.)
Leverage Your Purse-String Power
Every donor should get full value in regard to these two types of return on investment (ROI) from donations:
Personal ROI: In addition to estate and income-tax benefits from your charitable contributions, you can actually receive income from or retain lifetime partial access to donated assets. Charitable trusts, gift annuities and pooled-income funds might be a perfect alternative to direct donation if you're in an in-between state of knowing you're well off, but afraid of living so long that you might need charity yourself if you give away too much now.
Charity's ROI: Just as corporations vary widely in how efficiently they operate, so charities. Do your due-diligence financial homework - and get directly involved as a volunteer if possible - to maximize your personal satisfaction from money well spent.
"Investing" in a financial consultation with a CPA and/or financial advisor highly experienced in charitable giving is well worth the cost for many individuals, and is something to consider, particularly if you will be making large and/or consistent donations.