What You Need to Know About Charitable Giving and US Tax Deductions

What You Need to Know About Charitable Giving and US Tax Deductions

People give for a plethora of reasons: we feel passionate about supporting a cause; we want to give to those less fortunate, we want to leave a positive legacy. But the fact remains that giving wisely is better than throwing caution to the wind, and tax-wise strategies can help us make smarter decisions where our taxes are concerned. Charitable giving and US tax deductions may be more convoluted than you think.

If you’re like most people, you donate to charity to make a difference in the world or to support a cause you believe in. However, the amount you donate is actually an important financial decision. Tax breaks may enable you to give more than you might otherwise, allowing you to contribute even more to organizations you care about while reaping some unexpected benefits. 

Keeping Up with Legislation Related to Charitable Giving and US Tax Deductions

When you construct a strategic long-term plan for giving this year and in the years ahead, staying on top of potential legislative changes like those discussed in Congress can be beneficial.

With any tax or economic reforms, there are always unknowns. While we know which measures the Biden administration is pursuing in the Build Back Better plan, making any big changes may be difficult due to the Democratic Party’s slim majority in Congress. If they go forward, many of these ideas will likely evolve as a result of further debate, modification, and negotiation among elected leaders, the Treasury Department, and the IRS.

Current Proposals That Could Affect Your Charitable Giving 

Several tax reform options are being debated by the Biden administration and Congress, while others have been offered previously. While the specifics may alter depending on current political realities, considering these concepts can still assist you make charitable donations this year.

Changes affecting corporate taxes (and the impact on charitable giving)

Changes to corporate taxes were included in the Build Back Better framework, which may have a negative impact on business owners and investors. Changes to several overseas taxes are proposed, as well as a new book minimum corporation tax of 15% for companies with profits of at least $1 billion. Furthermore, the plan would impose a 1% excise tax on corporate stock buybacks, with exceptions for stock contributed to retirement plans and equity-based pay.

Charitable tax deductions for corporations differ based on the type of business, but these improvements may increase the value of corporate philanthropy in the future. Additionally, complementing vesting stock awards with charitable giving can be a potent strategy—but equity pay may be impacted by a new book minimum tax. A trusted tax counsel should be consulted by business owners and employees with stock pay to determine how their financial status may be affected.

Increase in capital gains tax rate (could make the benefits of charitable giving more significant)

The Biden administration advocated raising tax rates for high-income earners, namely those making more than $400,000 per year. If pursued, the highest income tax rate may be raised from 37 percent to 39.6 percent.

Higher marginal tax rates may amplify the benefits of charitable giving by boosting the value of the tax deduction in comparison to a similar gift made under existing laws. Charitable giving may become an even more essential approach for taxpayers seeking to maximize itemized deductions and reduce their overall tax liabilities.

Some Tax-Related Questions People Have Asked

Whatever the future holds, it’s important to take a closer look at your present tax approach to ensure that you are taking advantage of any available planning opportunities. Consider reaching out to our team to talk about how charitable giving can help you achieve your long-term financial goals. 

In the meantime, we’ve answered a few frequent tax questions below to help you get the most of your contributions:

1. How much of the appreciated assets I gifted last year are deductible?

If you itemize your deductions and donate to a public charity, you can generally deduct up to 50% of your adjusted gross income for appreciated assets. If you give more than that, you can usually carry the excess forward for up to five years.

2. What do I need to do to claim a charitable deduction?

You must include an IRS Form 8283 with your tax return if you made a non-cash donation. You must also obtain a qualified appraisal and have the charity and the appraiser sign your Form 8283 if you made a non-cash contribution of more than $5,000 (other than publicly traded securities). If the value of the gifted asset exceeds $500,000, a qualified appraisal must be attached to the IRS Form 8283.

3. Can I deduct the entire value of my appreciated asset gift?

When donated to a public charity, such as a donor-advised fund sponsor or supporting organization, gifts of closely held business, real estate, and publicly traded securities can normally be deducted at fair market value.

4. What other factors will impact my tax deduction?

We recommend consulting with a financial advisor because value discounts, ordinary income assets, and debt may affect the amount you can deduct for charitable gifts of appreciated assets.

It’s Time to Look For Smarter Ways to Increase Your After-Tax Income

In terms of charitable tax planning methods, potential tax revisions bring both opportunities and challenges. While these ideas are still just that for the time being, it could be a good idea to check in with your financial advisor or reach out to our team, and we’ll help you review your current circumstances and understand how the proposed restrictions might affect your charitable giving.