Generous deductions

 

guest commentary by David Potts

It’s getting toward the end to the year. You’re behind on your pledge at church and you begin to imagine the preacher flipping through pledge cards and his eyes landing on your name. You think to yourself, “Will he pray a curse on me?”

Or maybe you’ve been blessed and had a great year financially and just want to express your gratitude by giving back. Whatever your motivation, we are about to enter what I call the “giving” season. It’s that time of year where I feel I haven’t done my part to support my church and certain charitable organizations and I need to give to them soon so I can deduct the amount to lower my 2011 income taxes.

If you have a history of charitable giving you probably already know that if you itemize your deductions (versus taking the standard deduction) the amount you contributed during the year helps lower your income tax liability. To qualify as a deductible charitable contribution, you must donate to a church or religious organization, nonprofit schools and hospitals, the Salvation Army, the Red Cross, etc. Giving directly to an individual in need or an organization with a political agenda are legal, but not tax deductible.

You may, if you are really patriotic, make a deductible charitable contribution to your Federal, state or local governments. If you just wait another year or two, these governments will take your money away from you anyway through tax increases. If you have any doubts as to whether an organization qualifies as a charitable organization for tax purposes, IRS Publication 78 – Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986 lists many of the organizations that have qualified with the IRA as qualified charities.

Your church won’t be listed in this publication. Don’t worry. Churches are exempt from applying for charitable status with the IRS.

If you are 70 1/2 or older with money in an Individual Retirement Account, the Internal Revenue Code allows a taxpayer to make a contribution directly from your IRA to a charitable organization. But remember, directly from your IRA means just that. The bank or trustee must send the money directly to the charity. You can’t take the money out of the IRA, deposit it in your checking account, and then write a check on your personal account and mail it to the charity.

There are benefits for making a qualified charitable distribution (a.k.a. a charitable contribution) from your IRA. But you must make your charitable distribution before Dec. 31, 2011 to receive these benefits. On January 1, 2012 this Internal Revenue Code provision expires, for good. The reason you might want to give directly from your IRA is that if the IRA distribution is normally included in your taxable income (e.g., you have a traditional IRA instead of a Roth IRA), up to $100,000 of the distribution can be excluded from your taxable income.

Additionally, the qualified charitable distribution will be counted toward your required minimum distribution. (If 2011 is the year you turn 70 1/2 and you have a traditional IRA, you must begin making “required minimum distributions” from your IRA and these distributions are normally considered taxable income. If you are older than 70 ½ and you haven’t been taking required minimum distributions annually, you need to see your accountant.)

Contributing to a charity directly from your IRA has other advantages compared with making contributions from your checking account. Your aggregate charitable contribution deduction is generally limited in any one year to 50% of your adjusted gross income with the excess carried forward to be deducted in a future year. Qualified charitable distributions from your IRA are not subject to this annual limitation. [Note: Charitable contributions to certain foundations are limited to 30% of adjusted gross income].

Bottom line: If you are 70 1/2 with an IRA and you want to take advantage of this expiring provision of the Internal Revenue Code allowing direct distributions (contributions) to your church or favorite charity, start your planning today. The shortest first step would be to call your CPA. If you are retired or have plenty of time and you are an avid do-it-yourselfer, read IRS Publication 526 – Charitable Contributions and Publication 590 – Individual Retirement Arrangements (IRAs), and then call your CPA.

Keep this in mind too. The IRS requires you to keep records to document your charitable contributions. If the contribution is less than $250, you must keep a receipt showing the name of the organization along with the date and amount of the contribution or a bank record such as a cancelled check with the same information.

If the contribution is more than $250, you must have a written acknowledgement from the charitable organization listing the date and amount of the contribution.

If you give multiple gifts to an organization, you must have a written acknowledgement for each contribution over $250 or one written acknowledgement listing the date and amount of each contribution with a total of your contributions for the year. Without the proper documentation, by law, you can’t deduct your contribution.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Also, feel free to e-mail topic suggestions or questions to [email protected]