With the tax year-end and holidays around the corner, now's a great time to analyze charitable giving. It’s slightly more complex than one might think, and it’s important to do it the right and tax-beneficial way. Newtown City Lifestyle asked William “Chip” Bromley, principal and co-founder of iNNOVA Wealth partners, located in Newtown, to get the skinny on giving.
What qualifies as tax-deductible donations?
Generally, a charitable contribution is a donation or gift to, or for the use of, a qualified charitable organization. It's made without getting, or expecting to get, anything of equal value. Unfortunately, time volunteering cannot be utilized for a deduction, but expenses associated with your time (mileage driven, parking costs) can be considered for tax deductions. Some items that could be considered deductible charitable contributions are cash and equivalents, financial assets, clothing, household goods and vehicles.
Are there donation maximums from a tax benefit perspective?
There are varying limits and nuances as it relates to receiving a tax deduction for a donation, but one important point is if an individual or couple takes the standard annual tax deduction, then they won't receive an additional tax deduction for charitable donations in 2022; they must move to an itemized deduction. Generally, if you itemize your deductions, you can deduct up to 60% of adjusted gross income, but some items and donating to specific charitable organizations (certain private foundations, veterans’ organizations, fraternal societies and cemetery organizations come with a lower limit) may reduce your contribution limits. If you do contribute over that limit, you can carryover tax deductions associated with charitable gifts for up to five years.
For donating merchandise items, what are the best guidelines on estimating values?
Any non-cash donations should be appraised for market value at the time of gifting. Additionally, monetary gifts should also include proof of value; which might be a receipt from the charity, bank statement showing the gift, or a copy of the check.
What's the best practice for tracking donations during the year?
Always document donations! If you’re relying on an appraisal for non-cash items, save the form or computation for valuing your donations. Tracking donations isn’t just important for non-cash donations. Any cash or financial donations absolutely should be documented in case of an IRS audit.
What are the benefits of donating stocks?
If you typically support charities with cash, a stock donation could provide even greater benefits to both donor and recipient. Let’s say you traditionally donate $1,000 and dip into your investment portfolio to raise the cash. This will likely create a taxable capital gain for you and as a result, the donation ultimately costs you more than the $1,000. But if you chose to donate stock instead of the cash, you never need to sell that stock and create a taxable event. Instead, you give the stock directly to the qualified charitable organization of your choosing and the potential tax consequence travels with the stock transfer. Because Section 501(c)(3) charitable organizations do not pay capital gains tax, they can sell the stock and reap the benefit of the full $1,000 gift while no taxes are paid by either party.
How can your firm assist clients with maximizing tax benefits of charitable giving?
Our firm continually works to educate and assist our clients to maximize their charitable giving. Many times, this is just a minor tweak of the source they are gifting, but other times this can include advanced gifting techniques.
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INNOVA is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience.