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January
2001 On-line Tax Planning Charitable Tax DeductionsEach of us has our favorite charities. The range of services provided by charitable organizations is broad and encompasses services as diverse as education, health care, religious and the fostering of amateur sports. In spite of their diversity from one another, every charitable organization has a common attribute: Each needs more funding! While it is important that a philanthropic desire precede the search for tax deductions in making charitable donation decisions, it is worthwhile to consider the tax benefits of making these deductions. It is particularly important to know that the means by which a donation is made can affect the tax benefits to the donor. We will discuss more common planning techniques in this article. First, lets review the basic rules for claiming charitable contribution deductions. Charitable contributions are an itemized deduction claimed on Schedule A of your individual income tax return (Form 1040). To benefit from itemizing, a married couple needs to have total itemized deductions of $7,350 in 2000 ($9,050 if both are at least 65 years of age). As income rises above $128,950, the amount of itemized deductions needed to benefit increases linearly. Charitable contributions may be made either in cash or in kind. The limit on the amount of charitable deductions allowable in a given year differs between cash and in kind donations. A taxpayer may deduct cash donations in a year in an amount equal to 50% of his adjusted gross income for that year. The limit for most in-kind donations (marketable securities are a commonly donated asset) is 30% of adjusted gross income if the taxpayer chooses to deduct the full fair market value of the asset. Any amounts not currently deductible because of these limitations may be carried forward for five years. To estimate the tax benefit you would receive by making a charitable contribution, you multiply the amount of the deduction by your federal marginal tax rate. That rate is the one you pay on your next dollar of income, and it increases as your taxable income increases. The following chart illustrates the 2000 marginal rates at various levels of taxable income for single and joint taxpayers.
So, for example, a single taxpayer with expected taxable income of $100,000 who makes a $10,000 charitable contribution would expect to save approximately $3,100 ($10,000 X 31%) of federal income tax. Indiana does not allow a deduction for charitable donations. A taxpayer who donates an appreciated asset held more than one year to a charitable organization receives an additional tax benefit: he does not have to pay tax on the capital gain. For example, a taxpayer in the 31% federal marginal rate bracket owns 1,000 shares of XYZ Corp., a publicly traded stock. The stock of XYZ Corp. trades for $20 per share, but the taxpayer paid only $5 per share for it. If he sold the stock, he would recognize a $15,000 long-term capital gain, resulting in a $3,000 tax liability due to the IRS. If he donates the XYZ Corp. stock to a charitable organization instead of selling it, he does not have to pay the $3,000 tax. And, he receives a $20,000 charitable contribution deduction, which saves him $6,200 ($20,000 X31%) of federal tax. Good tax planning for charitable donations requires you to at least consider the option. Another favorite technique is
donating $400 ($200 for single tax payers)
Many other planning techniques concerning charitable contributions are available and are frequently employed. Some of these techniques include the utilization of Charitable Trusts and create endowments which continue beyond the donor's life. These techniques are complex and beyond the purview of this article; you should consult your tax advisor for more details. Americans as a group are a
generous people. Donations to charitable organizations have
increased significantly over the past several years. The desire to
help others and to promote worthy causes is the primary catalyst for these
contributions. However, the tax benefits should not be overlooked.
Bucheri McCarty &
Metz LLP Telephone: (765) 236-2300 | ||||||||||||||||||||||
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to Indiana colleges or universities. A taxpayer in the top tax
bracket saves $158 ($400 X 39.6%) in federal tax, and in addition, Indiana
allows a tax credit of 50% of the first $400 ($200 for single taxpayers)
of these donations, resulting in an additional $200 of Indiana tax
savings. So, a $400 donation to an Indiana college or university
costs you as little as $42 after tax!