Most people give the majority of their charitable donations during the holiday season. There is a way to transfer assets to a charity in a tax-advantaged way, but this opportunity expires at the end of the year.
It’s called the Pension Protection Act of 2006. This act allows people who are 70-1/2 or older by the date of contribution to donate up to $100,000 tax-free annually to a qualified, public charity (as determined by the IRS) from either a traditional or Roth IRA. Such contributions are excluded from the donor’s gross income and are therefore exempt from federal income taxation.
Taxpayers can utilize this provision to satisfy their annual required minimum distribution. If an individual was required to withdraw five percent from their IRA, for example, they could donate up to $100,000 directly and realize the tax benefits of the new provision while supporting their favorite charity. This is a bonus for high income taxpayers whose itemized deductions have been limited.
Avoiding Capital Gains Taxes
To avoid capital gains taxes and help charitable causes, donate appreciated stock or mutual fund shares. The Pension Protection Act means that individuals get to see more of their dollars go to work directly for the charity. Previously charitable gifts were diluted because of the income tax paid on withdrawals. Charities are now benefiting from the full contribution.
Avoiding Scams
More than one million federally recognized charities solicit for charitable contributions each year. We tend to be bombarded with requests for charitable contributions around the holidays. As such, it’s important to be wary of scams. To avoid scams, be sure to research charities prior to donating. Fake charity scams often name themselves in a fashion similar to a legitimate charity. Beware of email solicitations for donations. Legitimate charities don’t use email for this purpose.
Tax Exempt Vs. Tax Deductible
It’s important to understand the difference between “tax exempt” and “tax deductible.” Tax exempt means the charity doesn’t have to pay taxes, whereas tax deductible means contributions can be deducted on federal income tax returns. Even if a charity is tax exempt, contributions may not be tax deductible. Investigate prior to donating. Also, never donate cash; always write a check.
Consult your tax or financial advisor for help determining the best charitable giving options. Online databases, such as GuideStar, Charity Navigator, or the Better Business Bureau Wise Giving Alliance can provide assistance as well.
