Hurricane Harvey was one of the worst storms in US history, killing over 60 people (as of September 5), leaving countless people and pets homeless, and destroying businesses all throughout the affected areas.
With the amount of repair and restoration needed, it is projected to the be the costliest natural disaster in US history. Needless to say, it will take years and a lot of help to rebuild. Here are five tax-smart ways to donate:
1. Donate your appreciated stock
Donating appreciated stocks might be the most tax beneficial strategy when it comes to charitable contributions. You avoid paying tax on the capital gain and you get a tax deduction (if you itemize) for the fair market value of the securities at the date of the donation.
For example, if you sold a share of stock for $1,000 that you bought at $100, you’d normally have to pay capital gains tax on the $900 gain. If you donate that stock instead, you avoid the capital gains tax and get the benefit of a $1,000 charitable contribution deduction.
Therefore, donating appreciated stock is more beneficial than selling the stock and donating the money.
2. Roll over your IRA
If you are over 70 ½ years old, you are required to take minimum distributions (which are taxable) each year from your IRA. With the IRA Charitable Rollover, you are able to donate your required minimum distributions (or a portion thereof) by rolling them over directly to a charity of your choice. The rollover limit is $100,000 per year.
The benefit to rolling over your qualified distributions to charity instead of donating cash is that the IRA charitable rollover is excluded from income instead of treated as a charitable deduction.
For example, if you take an IRA distribution for the year in the amount of $100,000 and then donated that $100,000 of cash, you would have to show income of $100,000 and a charitable contribution deduction of $100,000. Your total charitable contribution deduction each year is limited to 50% of your income (the remainder is carried over). Continuing with the example, you’d have to pay tax on the $50,000 difference between the $100,000 of income from your IRA and the $50,000 limited charitable contribution deduction.
If instead, you rolled over the qualified distribution directly to a charity, your income would be lowered by the full amount of the contribution. This results in a full deduction of the amount contributed in the year of contribution and it lowers your total income, which could even knock you down a tax bracket. If you want to donate more than $100,000, you can, but the exclusion of income is limited to $100,000; anything over that will be treated as income and a charitable contribution deducted on Schedule A.
3. Set up a donor-advised fund
A donor-advised fund allows you to contribute to a fund where the money will be invested, can grow tax-free, and then can be granted out to one or more charities at your discretion. You receive a deduction immediately when the money is contributed to the fund, not when the fund grants money to the charitable organizations.
If you’re in a high tax bracket, it is highly beneficial to set up and contribute to a donor-advised fund in order to get the immediate charitable deduction while still allowing the money to grow tax-free. Here is a good illustration of how a donor-advised fund works, provided by the National Philanthropic Trust:
4. Donate cash and/or goods
The deductible value of noncash contributions is generally provided to you by the receiving organization via a receipt, letter, or statement. Cash and noncash contributions are only deductible (on Schedule A) if you itemize.
5. Donate your time
If you are really proactive and plan to travel to the affected areas to help out, you can deduct the costs associated with volunteering (e.g., travel, lodging, purchased goods, etc.).
In order to be deductible, you must volunteer at a qualified charitable organization (you can verify if your organization of choice is qualified by searching here) and the trip must be solely for volunteer work. Making a vacation out of it won’t cut it. Make sure you save your receipts and document all activities throughout the trip.
Every little bit helps
If you haven’t donated yet, let the tax advantages listed above be the final motivator. Any donation, big or small, will make a difference.
The photo used in making the featured image of this blog post is by Brant Kelly (_DSC9073.jpg) [CC BY 2.0], via Wikimedia Commons
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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.
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