The Giving Season Winds Down
Written by Rosie Wolf Williams, Next Avenue
Featuring Partner Asher Rubinstein, Gallet Dreyer & Berkey, LLP
Seasonal sentiments and income-tax rules make the end of December a particularly busy time for qualified charities and the donors who support them.
Christmas is in the rear-view mirror and Americans are turning their thoughts to the new year — and charity. A whopping 12% of all charitable donations arrive in the last three days of the year, suggesting just how much tax deductions matter.
Much is at stake. Charitable donations grew by 4% in 2021 to nearly $485 billion, the National Philanthropic Trust (NPT) reports. Most of that amount — 67% — came from individuals.
However, many ordinary taxpayers have questions about the rules and regulations governing the deductibility — or taxability — of what they consider to be charity. For example, is there a limit to how much an individual can donate to a nonprofit group? What kind of paperwork do you need to document a donation? Is aid to a struggling friend or relative considered charity?
Answers to many such questions depend on the recipients, says Asher Rubinstein, partner at the law firm Gallet Dreyer & Berkey in New York City.
Tax-Free Gift Giving
Consider helping out a struggling friend or relative. "Under federal tax law," he says, "each person can give up to $16,000 per recipient, per year, without having to report any of the gifts to the IRS and without owing any federal tax." This applies to gifts to family members or friends.
The annual exclusion for gifts to family members or friends will increase to $17,000 in 2023. Taxpayers cannot deduct their gifts on their returns, but the recipients won't be required to pay income tax on the largesse.
Qualified nonprofits — organizations run for charitable or other purposes approved by the IRS — are another matter. Taxpayers can deduct donations of as much as half of their adjusted gross income to these groups.
"For 2022, the limit for cash contributions is 60% of one's adjusted gross income," says Rubinstein. "The limit on non-cash donations can be as much as 50% of AGI or as little as 30%. It depends on what is being given and to what type of charity."
Indeed, Internal Revenue Service rules governing deductions change often, and for certain assets, such as appreciated securities, they are dauntingly complex. Rubinstein advises people to consult with a tax attorney for proper planning and reporting.
Frequently Changing Rules
Paul Miller, managing partner at the accounting firm Miller & Company, LLC in New York City, notes that in 2021, Congress temporarily increased the deduction limit to 100% of an individual's adjusted gross income to encourage charitable giving during the COVID-19 pandemic.
Miller agrees that taxpayers should be prudent and seek out professional advice on how to conform to IRS rules and maximize the deduction they claim. "The initial step to ensuring your contribution is tax-deductible is to confirm that the recipient organization is tax-exempt," he adds.
If you use a credit card to donate to a charity, the contribution is deductible in the year when it is charged to your card, not when you pay the bill.
Picking the Right Charity
How do you decide on a charity? Rubinstein says to stick with organizations that are in line with your values and are meaningful to you. "Once you identify which causes are important to you," he adds, "it is important to do due diligence on the charitable recipient. A good place to start is to ask these questions:
- Does the charity have the proper IRS accreditation (501(c)(3) status, for example) to affirm that the agency recognizes the charity? The tax agency will reject deductions to charities it has not accredited.Does the charity have a record of any lawsuits and investigations?
- How much of your donation will be spent on the nonprofit group's programs and how much will be eaten up by administrative costs, fundraising activities and salaries?
Create a Legacy
Giving can be a part of your annual financial goals, but what happens after you are gone? So-called legacy giving can extend your charitable aspirations after you die.
"You can accomplish legacy gifting by including charitable bequests as part of your will," says Rubinstein. "You could also establish a trust that will continue to exist after your death, and the trustee that you name would follow the instructions you set that are written into the trust.
"It's a way to leave behind an actual legacy in the form of a gift or even an annuity, long after one's death," Rubinstein adds. "You can even set conditions for the legacy gift, such as giving $100,000 annually, so long as the recipient continues medical research into breast cancer prevention" or whatever activity you want to support.
Keep Accurate Records
It is important to keep accurate records of your gifts to charity. "Proper valuation of the gift is important, especially for non-cash gifts, like artwork or real estate, the value of which can be difficult to determine or can fluctuate," says Rubinstein. "Thus, an appraisal is important. If the IRS challenges the charitable deduction, a proper appraisal from a certified appraiser will back up your position."
You must also keep records of your "tax basis," which is generally the price at which you acquired the property (such as a home or work of art). The value of the gift at the time you donate it is also important. That basis will "carry over" to the recipient of the gift and may have a bearing on the future disposition of the property.