Charitable Giving and Taxes – Know The Rules
The greatest benefit of charitable giving is the knowledge that you’ve helped make a difference in the lives of others. Yet giving can also provide tax breaks so long as you are aware of the rules and keep track of what you have donated.
What does giving to charity mean to you? While the greatest reward of giving may be the knowledge that you have made a difference in the lives of others, charitable giving can also provide tax benefits, if you know how to give and how to keep track of what you have donated. You should consult with a legal and tax professional on charitable giving matters.
Giving Methods at a Glance
Here are a few of the more popular ways to give, along with their associated tax rules.
Direct Gifts of Cash—Direct cash donations are the easiest to report. Always pay by check and make the check payable directly to the charity.
• Cash gifts of any amount are not tax deductible unless accompanied by a bank record or a written receipt from the charity. See IRS Publication 526, Charitable Contributions, for details.
• For contributions (either cash or property) worth $250 or more, you must also obtain a written acknowledgment from the organization indicating the amount of the cash and/or a description of any property contributed. If any goods or services were provided by the charity in exchange for the gift, a description and a good faith estimate of the value of those goods or services must accompany your tax return.
• See IRS Publication 526, Charitable Contributions, for details.
Direct Gifts of Property—Noncash gifts of property include such items as clothing, jewelry, furniture, computers, automobiles and boats.
• You generally can deduct the fair market value of property you donate to a qualified charity.
• If your deduction is worth between $500 and $5,000, you must complete IRS Form 8283 and attach it to your return. To claim a single noncash gift worth more than $5,000 (excluding publicly traded stock), you must include an appraisal of the gift’s value with your tax return.
• See IRS Publication 561, Determining the Value of Donated Property, for details.
Charitable Gift Annuity—An arrangement in which cash or property is transferred to a charity in exchange for the charity’s promise to make fixed payments to beneficiaries, typically you or your spouse, for life.
• For cash, part of the payments will be taxed as ordinary income and part may be tax free.
• For appreciated securities or real estate owned more than one year, part of the payments will be taxed as ordinary income, part as capital gains and part may be tax-free.
Donor-Advised Fund—A fund maintained in your name by a public charity from which you may recommend grants over time for charitable purposes.
• An immediate tax deduction, up to 50% of adjusted gross income for cash; 30% for appreciated assets.
• May avoid capital gains tax for gifts of long-term appreciated securities.
Charitable Remainder Trust (CRT)—An arrangement in which cash or property is transferred to a trust. You and/or other beneficiaries receive income from the trust for a period of time, after which the remaining principal becomes the property of the charity.
• No capital gains tax on donated assets.
• An immediate tax deduction based on the present value of the remainder interest in the trust.
• Beneficiaries are taxed on income received on a tiered system.
Charitable Lead Trust (CLT)—A CRT in reverse. Charities become the income beneficiaries, receiving a stream of income from the trust for a period of time, after which the named noncharitable beneficiaries receive the remaining trust principal.
• No capital gains tax on donated assets.
• The donor pays discounted gift taxes on donated assets.
Charitable donations are an excellent way to make a difference in the lives of others while also reducing your taxes. Please contact me to learn more about how I can help you and your family make a difference.
Callout: Is Your Charity Legal?
• In order for your contributions to a charity to be tax deductible, the organization much be registered as an official charity under IRS Section 501(c). To verify the status of a particular organization, use the IRS Exempt Organizations search tool.
For More Information
If you’d like to learn more, please contact Irene F. Stolarz.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving charitable giving, trust, estate planning, philanthropic planning and other legal matters.
Article written by McGraw Hill and provided courtesy of Morgan Stanley Smith Barney Financial Advisor.
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