Include Charity in Year-End Planning

Charitable Giving and Year-End Tax Planning

As the holiday season approaches, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind.

Charitable giving can be enhanced using income tax deductions, making it more effective when it is included as part of year-end tax planning.

Assume you are considering making a charitable gift equal to the sum of $1,000 plus the income taxes you save with the charitable deduction. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).

A word of caution

Be sure to deal with recognized charities. It is common for scam artists to impersonate charities using bogus websites, and through contact via e-mail, telephone, social media, and in-person solicitations. Check out the charity on the IRS website at www.irs.gov, using the Exempt Organizations Select Check search tool. Never give or send cash, always contribute by check or credit card.

Tax deduction for charitable gifts

If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). Your deduction for gifts of cash to public charities is generally limited to 50% of your AGI for the year; and other gifts, typically capital gain property, may be limited to 30% or 20% of your AGI. Disallowed charitable deductions may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. Be sure to retain paper substantiation of your deduction for a charitable contribution.

Year-end tax planning

When considering making charitable gifts at the end of a year, it is generally useful to include them as part of your year-end tax planning. You generally want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket.

If you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction when it produces a greater tax benefit. Or you might push the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction. If the income percentage limits above are a concern in one year, you might move income into that year or move deductions out of that year, so that a larger charitable deduction is available for that year. A financial or tax professional can help you evaluate how to make charitable gifts in a way that is beneficial to you.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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