Last spring I became relatively involved with St. Peter’s Stewardship Committee out here in Greenwood Village, Colorado. With membership ranks and pledged donations struggling, my wife and I developed a plan to drill down into several aspects of charitable giving and report findings along the way.
Four underlying themes have surfaced including that the vast majority of us do NOT:
- Realize the amazing benefits of charitable giving
- Appreciate the true power of intentional, local or targeted giving
- Understand the income tax benefits of charitably giving
- Know how to give.
In the myriad of ways to attach a metric to the idea of success, the measure that arguably resonates the most IMHO is one’s ability to give back. The best way to give back is to donate charitably of both resources and time. Once a person experiences the powerful fulfillment in their heart of giving usually there is no other reason required to free up a schedule and volunteer time or to find money in a budget to give to a worthy cause.
Like icing on a cake though, there are also powerful income tax benefits to being charitable.
Over the last 15 years or so I have been hired by some of the most established people on this planet to figure out legitimate ways to minimize all the various US federal, state and local taxes endowed taxpayers are required to hand over to our often times less than discerning elected officials. It is most definitely a nerd’s job.
From these experiences, the main lesson learned is that the best way to reduce personal income tax liability and simultaneously give back with intention is to donate charitably. It is as simple as that. The US Tax Code encourages charity by reducing the individual income tax burden of those who give. How is this possible?
A charitable contribution is a voluntary gift of a present interest in property to a qualified charity. A qualified charity is an organization eligible to receive contributions and acknowledge a charitable deduction in writing.
Charitable contributions as per IRC §170 can reduce the amount of your (and your estate’s – per IRC §642) income that may be subject to income tax. As per IRC §2055 the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers to charity. There are five types of organizations eligible to receive tax-deductible contributions:
- Charitable organizations
- Governmental units
- War veterans organizations
- Fraternal associations
- Certain non-profit cemetery companies
If you are in doubt whether a charity is eligible to receive a deductible contribution, the IRS maintains a publicly available database of qualified charities called Exempt Organizations.
When it comes to ‘how’ to give it was dumbfounding to learn that most people over the age of 70 ½ had no idea of what a Qualified Charitable Distribution (QCD) is or how to use it to legitimately minimize income tax liabilities here and now.
If you are over the age of 70½ you might be keenly aware of the dreaded ‘Required Minimum Distribution’ (RMD) from your qualified plan. In lieu of taking an RMD, you can assert a Qualified Charitable Distributions (QCDs) and minimize your income tax liability. In order to qualify for a QCD:
- You must be at least 70 ½ years old
- Your distributions must be given to a qualified charity, and
- Your distributions cannot annually exceed $100,000.
A QCD can count towards an RMD as long as the distributions are NOT made to a Donor Advised fund or other supporting organization as these do not qualify.
The 2015 “extenders” legislation made the QCD provision permanent. Income is never recognized and no deduction claimed on the return. Also, QCD’s are not subject to the other limits on deductions for charitable contributions.
The Protecting Americans from Tax Hikes Act of 2015 excludes from income for QCD of up to $100,000 per year received from an IRS. The exclusion from income of such distributions provides several benefits, including:
- Reduction of adjusted gross income and resulting deductions and limitations
- Realization of the benefit of an itemized charitable deduction without having to itemize (prepare Schedule A)
- Consideration in lieu of an RMD from a traditional IRA.
Additionally your RMD can also be decreased by the amount of the donation, potentially allowing you to keep more within the tax-deferred environment of an IRA.