This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.
You might want to consider three charitable giving strategies that can help boost your 2014 charitable contribution deduction.
- Use your credit card. Donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year end enables you to increase your 2014 charitable donation deduction even if you’re temporarily short on cash or just want to put off payment until later.
- Donate a life insurance policy. A number of charities are asking their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem because charities normally earmark such gifts for their endowment or long-term building funds.
If handled correctly, a life insurance policy donation can net the donor a charitable deduction for the value of the policy. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, no deduction is allowed. For this reason, we encourage you to contact us if you are considering the donation of a life insurance policy. We can help ensure that you receive the expected income or transfer tax deduction and that the contribution works as planned.
- Take advantage of a donor-advised fund. Another charitable giving approach you might want to consider is the donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations.
With donor-advised funds, which are available through a number of major mutual fund companies, as well as universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice.
The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. These funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.
If you’re counting on a federal income tax deduction for donating to a charity, you should confirm that the charity has been approved by the IRS as a tax-exempt organization eligible to receive deductible contributions.
For some charities, this is easy — everybody knows the American Red Cross, the Salvation Army, and Goodwill are IRS-approved tax-exempt charities. But what about verifying that tax deductions are allowed for contributions to less well-known charities? Good question.
To determine which organizations are tax-exempt outfits eligible to receive deductible contributions, follow this procedure.
- Access the IRS website home page at www.irs.gov.
- At the top of the home page, enter “EO Select Check” in the search bar.
- Click on “EO Select Check.”
- Click on the blue “Exempt Organizations Select Check Tool” box.
- Under “Limit search to organizations that (select only one),” select “Are eligible to receive tax-deductible contributions.”
- To the extent you’ve got the requested information, fill in the blanks for the charity you’re searching for. You probably won’t have the charity’s EIN, but if you know its name and the city and state where it’s located, that should be sufficient. Hit the search key.
- A (probably long) list of charities will appear. Scroll down until you find the one you’re looking for. By clicking on the arrow beside the “Legal Name” link at the top of the list, you can order the list alphabetically by name of organization. You can also organize the list by the cities where organizations are located.
- Once you find the line for the charity you’re searching for, click on the “Deductibility Status” link on the far right. For example, if the status is PC, the organization is a public charity (the most common kind). You can make deductible donations of up to 50% of your adjusted gross income (AGI) to one or more public charities. (AGI is the number at the bottom of page 1 of your Form 1040; it includes all your income items and subtractions for certain deductible items such as IRA contributions, alimony paid to an ex-spouse, and self-employed health insurance premiums.) If the organization’s status is SOUNK, the outfit is an organization that supports a public charity. You can make deductible contributions of up to 50% of AGI to such organizations. If the status is PF, the organization is a private foundation. You can make deductible contributions of up to 30% of AGI to one or more private foundations. Contact us for details on the deduction limitations that apply to charitable contributions.
It is not necessarily a deal-breaker if an organization is not on the IRS-approved list. For example, some churches and church-related organizations may not appear on the IRS website’s list of tax-exempt organizations because they are not actually required to apply to the IRS for tax-exempt status. For a non-church organization, not being on the IRS-approved list doesn’t necessarily mean it’s not IRS-approved, but serious skepticism is appropriate. If you’re still considering a contribution, ask the organization to send you a copy of the IRS determination letter that recognizes its tax-exempt status.
It’s smart to be skeptical about making significant contributions to organizations that claim to be tax-exempt organizations. Taking the steps outlined in this letter is probably a good idea even if you don’t care about a tax write-off. If you have questions or want more information about deducting charitable contributions, please contact us.