In addition to supporting organizations and causes that matter to you, charitable donations are one of the more common methods to access readily available tax benefits. However, while this process of donation may seem straightforward, there are a number of things to consider first.
What Are You Donating?
When making charitable donations, it’s common for first-timers to assume that cash is the most logical asset to contribute to their organization of choice. In reality, however, this is among the least cost-effective options you have if you’re looking for worthwhile tax benefits. Donating appreciable assets, such as stock or real estate, may be a better option. Firstly, since you won’t have to pay capital gains tax, you’ll shed a chunk of your capital gains tax liability. Secondly, the resulting tax deduction or credit is equivalent to the fair market value of that asset, which can be quite advantageous depending on its appreciation.
Making the Right Choice
It’s very important to bear in mind that not all gifts and not all organizations will get you the tax deductions or credits you’re looking for. Donations to individuals don’t qualify, and while certain political donations do qualify in Canada, tax deductions cannot be earned by individuals through political contributions in the US or the UK. Even tax-exempt charities that seem as though they are qualified recipients may not be, so it’s always wise to do your research on the organization and make sure that they are. While you’re at it, research the organization enough to better understand who you’re giving to and what your contribution will be used for!
Other Considerations
Properly taking advantage of the tax incentives offered by charitable giving requires careful planning and decision making. For example, a key rule of thumb is to be meticulous about documenting your donations by keeping thorough and organized records. If you’re donating physical goods such as clothing or a vehicle, it’s critical that they are in the right condition to qualify and are properly appraised. Meanwhile, those in the US should remember that the recent Tax Cuts and Jobs Act has almost doubled the standard deduction, raising the minimum amount you’ll need to donate in order to benefit from the tax incentive.
Smart tax planning is one of the most important parts of maintaining your estate and maximizing its value. You deserve to leave behind a legacy shaped by your wishes and the needs of your beneficiaries. To learn more about how we can help make it happen, get in touch with us today.