Three Tips for Supersizing Charitable Deductions for 2011
Thomson Reuters senior tax analyst explains options for U.S. taxpayers
Most individual taxpayers donate charitable gifts because they want to back a worthy cause, not because they get a tax deduction for the contribution. “Still, if they make the contribution anyway, why not get Uncle Sam to help get the most out of limited charitable dollars,” advised Robin Christian, a senior tax analyst for Thomson Reuters. “It’s a win-win for both the taxpayer and the charity.”
Following are three tax tips for getting the “biggest bang for a buck” when it comes to charitable contributions:
A charitably-minded investor can sell loser shares and then donate the cash; however, with winner shares, the investor may prefer to give the stock to the charity.
If the taxpayer decides to unload stocks and make significant charitable gifts this year, it is important to consider whether he or she would be better off to sell the stock and give the cash to the charity, or just give the stock to the charity. The answer will vary depending on whether the individual will have a gain or loss on the sale and how long he or she has held the shares, said Christian.
If the taxpayer has loser shares (currently worth less than what he or she paid for them) that need to be dumped, it is more beneficial to sell the shares and claim the resulting tax-saving capital loss on the tax return. Then, the individual can donate the cash sales proceeds to the charity and claim the resulting charitable write-off (assuming the taxpayer itemizes deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction).
With winner shares, the taxpayer could donate them to charity instead of giving cash. Here is why: for publicly traded shares that the individual owned for more than a year, the charitable deduction equals the full current market value at the time of the gift. Plus, when the taxpayer gives winner shares, he or she walks away from the related capital gains tax. “So, this idea is another double tax-saver (the taxpayer avoids capital gains tax on the winner shares, and he or she also receives a tax-saving charitable contribution write-off),” noted Christian. Because the charitable organization is tax-exempt, it can sell the individual’s donated shares without owing any tax to the IRS.
Volunteers can deduct out-of-pocket expenses.
Although the taxpayer cannot claim a charitable deduction for the time spent volunteering for a charity, he or she may be able to claim a deduction for unreimbursed out-of-pocket expenditures incurred in connection with those volunteer services (assuming the taxpayer itemizes deductions).
To be deductible, the out-of pocket expenses must be non-personal, directly connected with, and solely attributable to providing the charitable services. The individual must keep detailed receipts and records to substantiate the expense. And, if the expense is for $250 or more, he or she must have a written acknowledgement from the charity describing the services provided and indicating whether he or she received any goods or services from the charity in return. The amount of out-of-pocket expenses does not need to be shown on the acknowledgement.
This acknowledgement must be received before the taxpayer files their return or the contribution deduction will be disallowed, warned Christian. As the charity probably would not know that the volunteer incurred the expenses, the taxpayer will likely need to ask the charity to send them the required acknowledgement. This should be done well before the taxpayer intends to file the return.
Deductible expenses might include, for example, copying charges, office supplies, long distance phone charges, postage, and transportation costs from the individual’s home to the place charitable services are performed and while providing services for the charitable organization (at 14¢ per mile if he or she uses their own car). However, baby-sitting fees are not deductible even if the individual could not do the volunteer work without it.
If age 70½ or older, the taxpayer can make charitable donations directly from an Individual Retirement Account (IRA).
For 2011, traditional IRA owners and beneficiaries who are age 70½ or older can make cash donations totaling up to $100,000 to IRS-approved public charities directly from their IRAs. These donations are called Qualified Charitable Distributions (QCDs) and are federal-income-tax-free to the taxpayer; but the individual cannot take an itemized charitable write-off on Form 1040. “That’s okay,” explained Christian, “because the tax-free treatment of QCDs equates to an immediate 100 percent federal income tax deduction without having to itemize deductions. “While QCDs can be made from Roth IRAs, it’s generally not a good idea to do so because Roth IRA distributions to senior Roth IRA owners are likely already tax-free,” advised Christian.
QCDs are not included in the taxpayer’s Adjusted Gross Income (AGI). This lowers the odds that the individual will be affected by various unfavorable AGI-based phase-out rules, noted Christian. In addition, the taxpayer will not have to worry about the 50-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs count as payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, the taxpayer can donate all or part of the 2011 RMD amount (up to the $100,000 limit on QCDs) and therefore convert taxable RMDs into tax-free QCDs.
Those taxpayers, who are interested in taking advantage of the QCD strategy for 2011, will need to arrange with an IRA trustee for money to be paid out to one or more qualifying charities before year-end. The funds must be transferred directly from the IRA trustee to the charity. The individual cannot receive the funds and then make the contribution to the charity. However, the IRA trustee can give the taxpayer a check made out to the charity that the individual may deliver to the charity.
The QCD privilege is beneficial for seniors in the following circumstances:
- The taxpayer does not itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether the individual itemizes or not because neither the taxpayer nor his or her heirs will ever have to pay income taxes on the donated amounts.
- The individual’s itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
- The taxpayer wants to avoid being taxed on RMDs that they are forced to take from their IRAs. The QCD strategy does the trick while also allowing the individual to satisfy their charitable inclinations.
"The QCD privilege is scheduled to expire at the end of this year, so if an individual wants to take advantage of this strategy, it’s not too soon to start thinking about it," advised Christian.
Charitably minded taxpayers can increase the tax savings from their charitable contributions by making a few tax smart moves during the year. That way both the taxpayer and the charity win, noted Christian.
Taxpayers should consult with a personal tax advisor before applying these or other tax strategies.
Up-to-date analyses of legislation and regulations affecting individual taxpayers are available on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
About Thomson Reuters
Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare and science and media markets, powered by the world's most trusted news organization. With headquarters in New York and major operations in London and Eagan, Minnesota, Thomson Reuters employs more than 55,000 people and operates in over 100 countries. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges (symbol: TRI). For more information, go to www.thomsonreuters.com.
Ruth Ann Baker (U.S.)
Public Relations Manager
Tel: +1 972.250.7438