As we quickly close in on the end of another tax filing season, I thought it would be helpful to explain some of the basics of charitable giving as they relate to income tax. Obviously, there are many different reasons people give to charitable institutions (i.e. a personal connection to a charity, religious beliefs, tax planning methods, etc.). Whatever the reason you have to give, I hope this short discussion helps provide clarity and quality information as you plan ahead for taxes in 2017.
One of the major tax planning tools that can be utilized is charitable giving. When you give you to a qualifying charitable organization (501(c)3 organization), your contribution qualifies for a tax deduction that lands on Schedule A – Itemized Deductions. You can give cash, real property, personal property, stocks, and many other different assets. Most of your gifts (i.e. cash, most personal property, etc.) are subject to a limitation, which is 50% of your adjusted gross income (see the bottom line on page 1 of your 1040). Thus, you cannot deduct, in any given year, an amount greater than 50% of your AGI. Certain property, such as stocks, have a limit of 30% of your AGI. If you happen to give more than the AGI limit, you can carry forward the excess in each of the next five years until the carryover is used up. If you qualify to use your itemized deductions (as opposed to the standard deduction), giving can have a significant impact on your tax liability.
IRA Distributions – Qualified Charitable Distributions:
Taxpayers who are age 70 ½ and older have the opportunity to distribute otherwise taxable monies directly from their IRAs and Roth IRAs to tax-exempt charities, up to $100,000 per year. The gift does not go on Schedule A as a charitable contribution. Instead, it is included on your tax return as a non-taxable distribution from your IRA. The distribution counts toward a taxpayer’s required minimum distribution (RMD). Thus, taxpayers who do not necessarily need their IRA money for retirement can still meet the RMD requirements and give to charity at the same time. As the amount does not get included in your AGI, your IRA distribution does not impact the 50%-of-AGI limitation on your additional cash donations. Also, because the amount is not included in your AGI, other deduction/credit limitations subject to your AGI are not impacted as well (i.e. phase out of certain deductions or credits because of AGI limitations or net investment income limitations). These are just a few of the reasons why a direct distribution from your IRA to a qualifying charitable organization could help both your tax position and a charity’s budget.
Education in Indiana:
Here in Indiana, taxpayers have the opportunity to drastically reduce their state tax liability by simply “re-routing” their primary or secondary private institution gift. An individual can give to a Scholarship Granting Organization (SGO) and receive a School Scholarship Tax Credit. The credit is limited to 50% of your gift. Thus, if you give $5,000, the maximum credit available to you is $2,500. The state has a credit program limit as well. Once donors have used up the state’s credit limit, no more credits can be issued. The credit limit renews every July 1. Therefore, the most advantageous time to give is in July. By the time December rolls around and tax planning is in full swing, most of the credit limit begins to be used up. If you are wondering, “But Joe, I really want my contribution to go to a specific school, not just to a general fund”, then note that most of the qualifying SGO’s allow you to designate to what school you wish your contribution to go. By simply re-routing your gift (to an SGO where you specifically designate the education institute beneficiary) you get both a deduction on your federal return (subject to 50% of your AGI) and a 50% tax credit that can offset your state income tax liability. For more information, check out the website: http://www.doe.in.gov/choice/school-scholarships
If you have any questions regarding charitable giving, I would be happy to be a resource to you. Please feel free to contact any representatives of Treybourne Wealth Planners.