In the season of giving, clients often ask us about charitable giving and its tax implications. There are several options to those individuals with a generous heart. Charitable Foundation Trusts, or “private foundations” with Tax-Exempt status are expensive and time-consuming to create. Individuals with thousands of dollars to donate, however, would be wise to create a private foundation or public charity for tax reasons. If you are not one of the lucky individuals with thousands of dollars, however, charitable giving is a admirable choice. Charitable donations can also reduce tax liability. Certain kinds of gifting, however, is income and estate tax deductible, so lets go over the the IRS’s guidelines.
To take advantage of the income tax benefits of charitable giving, a donation must meet requirements established by the IRS. These include these rules:
- The donor cannot benefit from the donation. This includes giving to foundations or organizations where you or your family can benefit, or you are directly benefiting.
- The donor must be able to substantiate the donation. You must be able to keep a written record or bank record of the donation that you could prove as valid to the IRS.
- The donation must be made to or for the benefit of a qualified charitable organization, and;
- The donation may not exceed the current statutory ceiling. As of right now, the amount of your deduction for charitable contributions is limited to 50% of your adjusted gross income.
Now, let’s make a distinction between the income tax and the estate/gift tax sides to charitable giving. If it goes to charity, it can be deductible from your estate. If it goes to loved ones, it cannot. Remember, the donor cannot benefit from the donation, and giving to your family is seen as a benefit to the IRS. Pretty simple distinction, right? The gift-tax limit, as of right now, is $13,000. You can give up to that limit to a family member or friend and not pay tax on the gift. If it goes above that – you’re out of luck and the gift and tax must be reported to the IRS.
Another part of this complicated IRS tax equation is instance in which you can give to charity and it will be deductible if the charitable gift it is made as part of your will or trust. This is why people like Bill Gates and Warren Buffet can give their kids up to 5 million dollars – and pay no estate tax if they give their other billions to charity through their will or trust. You can give after you are deceased through your will or trust, and not have to pay estate tax! While there is no current estate tax in Oklahoma right now, it will likely come back in the future, so you should consider this when drafting your will or trust.
While it is the season of giving, you can give wisely and help your estate by using tax-savings benefits that the IRS has set up for generous individuals. Please consult with us today if you are interested in creating a private foundation, or would like to create or put charitable givings in your will or trust to save your beneficiaries some taxes in the future.
Don’t forget to read other posts at the Tulsa Estate Planning Blog.