This article was originally published on May 12, 2015.
With 2014 tax filings recently wrapped up for individuals, I have a few general recommendations if you are planning on making charitable donations in 2015. Before taking any specific actions, you should consult with a tax professional as there are limitations that can apply to deductions for charitable contributions.
When making a contribution to a non-profit organization, like a church or university, you should first make sure that the organization qualifies to receive tax deductible contributions. The easiest way to determine this is if the organization is validly recognized as a 501(c)(3) by the Internal Revenue Service. Most 501(c)(3) organizations can easily provide a determination letter stating that they are approved by the IRS and contributions are tax deductible, although some churches may not have a determination letter. In addition, you can check on your own whether or not contributions to the organization are deductible using the IRS Exempt Organizations Select Check Tool.
Contributions of appreciated property
If you have appreciated property such as stock, you can donate the stock directly to the 501(c)(3) organization. If the stock is directly contributed, you as a taxpayer, can receive a deduction for the full market value of the stock at the time the stock is donated and the 501(c)(3) can sell it free of income taxes as 501(c)(3) organizations are income tax-exempt. This is far more beneficial to individual taxpayers than selling the stock, realizing capital gains, and then receiving a deduction in the amount of cash donated to the 501(c)(3) organization. If stock is sold by the individual it will increase the individuals Adjusted Gross Income (AGI) which can lead to the phase out or disqualification from other tax deductions or tax credits. The tax code does impose limitations on deductions depending on the type of tax-exempt organization.
Qualified Contributions from IRA
In the past few years, Congress has allowed “qualified” charitable donations from an IRA; however, this has not yet been renewed by Congress for 2015. Stay tuned to see if Congress again passes this provision and allows qualified charitable contributions from an IRA in 2015. In 2014, Congress waited until December 19, 2014 to renew this provision for tax year 2014.
A qualified charitable donation from an IRA is allowed for individuals over the age of 70 ½ to exclude up to $100,000 from gross income by making a distribution directly from their IRA to charity. Donations from a traditional IRA, a beneficiary IRA, and a Roth IRA are eligible; however a donation from a SEP and SIMPLE IRA are not eligible as qualified charitable donations. The donation can satisfy minimum distribution requirements for an individual from the IRA. By making the qualified donation, the donation is not included in gross income, but does not qualify for a deduction. However, this treatment is beneficial because by being excluded from gross income, the amount of the contribution will not push gross income or adjusted gross income higher causing potential issues with the Alternate Minimum Tax (AMT) or other tax provisions tied to AGI.
Update: On December 18, 2015, the PATH Act (Protecting Americans from Tax Hikes) was enacted which makes the Qualified Charitable Distribution a permanent provision of the Internal Revenue Code. It no longer requires renewal every year