Tax Rules for Year-End Charitable Giving
Last year, individuals in the United States donated more than $3 billion to charitable organizations, according to a USA Giving report in June. During this holiday season, many people are moved to give to charity. Generosity may be motivated by philanthropic feelings and/or the desire to achieve tax benefits. Whatever the reasons for giving, make sure that tax rules are followed to optimize write-offs.
Donations in cash or property are tax deductible only by individuals who itemize their deductions (Code Sec. 170). There is no write-off allowed for those claiming the standard deduction. Deductions are allowed only for gifts to IRS-approved charities (see Publication 78 online at www.irs.gov/Charities-&-Non-Profits/Search-for-Charities). The IRS advises taxpayers to beware of scam organizations that typically arise after a natural disaster (see e.g., IR-2013-90, Nov. 15, 2013, following Typhoon Haiyan).
While itemizing is required for writing off donations, those age 70½ and older may make a tax-advantaged gift even if they do not itemize deductions. They can make direct transfers from their IRAs to a public charity up to $100,000. The amount they transfer is not includible in gross income (Code Sec. 408(d)(8)(F)); they do not receive any deduction for the donation. A transfer for 2013 can be made even if an eligible taxpayer already made a transfer in January 2013, which was credited to 2012 taxes (IR-2013-6, Jan. 16, 2013).
Those who can afford to transfer their IRA funds to charity may reap tax benefits beyond the tax-free treatment for the distribution. Because the required minimum distributions that would otherwise be includible in gross income are tax free, adjusted gross income (AGI)—the benchmark used for eligibility for various tax breaks and phase-outs—is reduced. For example, by minimizing AGI for 2013, less or no Social Security benefits may be includible in gross income for this year and the surcharge on premiums for Medicare Parts B and D in 2015 may be reduced or avoided.
Deductions for donations are capped at 50 percent of AGI if made in cash. Property donations usually are limited to 30 percent of adjusted gross income. Donations exceeding allowable limits can be carried forward for up to five years.
If you volunteer for a charity, you can deduct your out-of-pocket costs. Use of your vehicle (e.g., delivering meals to home-bound individuals for a charity) is deductible at the rate of 14 cents per mile. You cannot deduct the value of your services. Thus, if you do pro bono work for a charity, there is no deduction for your time and effort.
If you are a high-income taxpayer, you may lose some of the tax benefit from your giving in 2013. Under the so-called Pease limitation (named after the congressman who created it years ago), itemized deductions (other than medical deductions, investment interest, miscellaneous deductions, and wagering losses) are reduced when AGI exceeds a threshold amount that depends on filing status (Code Sec. 68):
• $300,000 for married persons filing jointly and surviving spouses;
• $275,000 for heads of households;
• $250,000 for unmarried persons who are not surviving spouses or heads of households;
• $150,000 for married persons filing separately.
The reduction in itemized deductions is the lesser of 3 percent of AGI over the applicable threshold amount, or 80 percent of itemized deductions otherwise allowed. Thus, regardless of income, an individual cannot lose more than 80 percent of itemized deductions, so at least 20 percent of the benefit from charitable donations is assured.