Charitable giving should come from the heart, but it can also be a smart tax strategy granted you play your cards right. From understanding the tax benefits of different types of giving to saving receipts, Charles Schwab offered up ways to maximize the gift of giving in 2018.
For investors to obtain the most benefits from donations and charitable giving, they first have to understand the ground rules. Take receipts for starters. According to Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research, investors who make donations of $250 or more to any one charity should get a receipt. If the donation is in cash, a receipt or bank record is necessary – regardless of how little or how much you give. Hayes says that gifts of property that are worth more than $5,000 or $10,000 should get an independent appraisal. However, exchange-traded stocks, bonds and mutual funds do not require the same treatment.
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Adams said that taxpayers who plan to deduct their charitable donations should itemize deductions, being mindful that if the standard deduction exceeds the charitable contributions and other deducted expenses combined, they won't be able to itemize. "You'll help your favorite charity – which is a good reason on its own – but won't reduce your tax bill," Adams wrote in a recent blog post.
According to The Charles Schwab Corporation's (SCHW) research arm, roughly 30% of taxpayers in the U.S. itemize their deductions. With the tax reform bill now the law of the land, that is expected to decline to less than 10% of taxpayers who continue to itemize charitable giving. Schwab said that taxpayers who give small amounts to charity and itemize will be affected the most, with the researchers finding that the increased standard deduction will lower the taxes owed by this group more than itemizing would. That will result in these taxpayers forgoing the charitable deduction altogether.
Those that have large annual itemized deductions that include substantial charitable donations will not be affected by the changes because their donations coupled with other deductions will typically be greater than the standard deduction. If the itemized deductions surpass the standard deduction, these taxpayers are likely to continue to itemize, receiving the full tax benefit from their charitable contributions.
When it comes to charitable giving, the way you donate can have a big impact on your tax bill, with some venues having more advantages over others. Cash, for example, is fully deductible and simple to give. Donating personal property gets a little more complicated because, under Internal Revenue Service rules, the gifts of clothing or household items have to be in good or better condition. If what you donated is related to the mission of the charity, you get to deduct it fully based on the current value, but if it's not related to the non-profit, you can only deduct the amount you paid for it.
Investors and business owners can also donate ordinary income property and long-term capital gain property and investments. According to Hayes, donating investments, particularly ones that have jumped in value, rather than cash can be a tax-efficient way to help a favorite charity. "Generally, if your assets have appreciated in value, it's best not to sell securities to generate the cash you need for a donation. Contributing the securities directly to the charity increases the amount you contribute and increases your deduction," Adams said. Other tax-advantaged ways to give include volunteering and giving via specialized charitable vehicles such as donor-advised funds or private foundations.