Sudden Tax Impact of Year-End Charitable Donations

Dec 14th 2016
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Are you looking to reduce your 2016 tax liability in the waning days of the year? There’s still plenty of time to contribute to one or more of your favorite charities.

Generally, you can deduct the full amount of your donations on your 2016 return for checks mailed or credit card charges posted before Jan. 1, 2017 – even if you donate to a charity online as you’re getting ready to celebrate New Year’s Eve.

What’s more, there’s an added tax incentive to step up charitable gift-giving this year. If President-elect Donald Trump pushes through some of his proposed tax reforms for individuals, as expected, the extra write-off may be worth more to you in 2016 than it will be in 2017.

For starters, the current law allows you to deduct the full amount of your charitable contributions, up to the limit of 50 percent of your adjusted gross income (AGI). If you’re giving away property, like a piece of art or securities, the deduction is limited to 30 percent of your AGI. Any excess may be carried over for up to five years.

But be mindful of the strict recordkeeping rules prescribed by the IRS. For donations of $250 or more, you must obtain a written acknowledgment from the charity, including the amount of the donation, a description of any noncash property that was contributed, and the value of any goods or services provided. Obtain these acknowledgements as soon as possible so you won’t have to scramble come tax time.

Also, other special rules apply to gifts of property. For instance, you’re required to provide additional tax return information for noncash contributions exceeding $500 and independent appraisals for property valued above $5,000. Don’t wait until the last minute to obtain documentation for these large gifts.

Finally, certain itemized deductions, including the deduction for charitable donations, are reduced slightly under the “Pease rule.” As things stand now, the Pease rule requires deductions to be reduced by 3 percent of the excess above an annual threshold based on filing status (not to exceed 80 percent of total deductions). For 2016, the threshold is $259,400 for single filers and $311,300 for joint filers.

Trump’s proposed tax plan, or any modified plan adopted by Congress, would likely create complications. The president-elect wants to replace the current seven-tier tax rate structure with just three brackets of 12 percent, 25 percent, and 33 percent. Therefore, someone who is now in the top 39.6 percent bracket would pay tax at a rate no higher than 33 percent.

On the downside, other restrictions might apply to charitable deductions. For instance, one proposed option would result in a $100,000 limit on deductions for single filers and $200,000 for joint filers.

Accordingly, deductions for charitable donations could be less valuable to upper-income taxpayers if changes are enacted, due to the reduced rates. In addition, a portion of your contributions might be completely nondeductible if new limits are imposed.

Practically speaking, it’s better to give charitable gifts sooner rather than later. The donations you make in 2016 will offset highly taxed income if you’re in one of the upper tax brackets. Conversely, the effective tax impact of charitable donations made in 2017 is yet to be determined.

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