The Gift Of Giving
With all the Federal tax rates including those on income, capital gains and dividends scheduled to rise in 2013, plus the Medicare surtax on high income earners, it may make sense to explore how charitable giving can affect your taxes owed. You should check with your advisor and CPA for how these specifically apply to you. Here is some food for thought:
From fancy cars and expensive clothes to fine dining and exotic vacations, there are many ways you can spend your hard-earned dollars. There is certainly nothing wrong with rewarding yourself for a job well done -- but what would happen if you rewarded someone else instead?
While the concept that giving to others can make you feel good about yourself is not revolutionary, there are several more subtle ways that giving your money or time for a cause can benefit your psychological, spiritual and emotional well-being.
Here are some reasons to donate to charity:
Ø Donations are tax deductible
When you donate to a charitable organization or a non-profit group, the amount you donate is tax deductible. For most donors, tax considerations are not the primary reason to give, but they still factor into gifting decisions. Understanding the changing tax environment is critical to maximizing the impact of your gifts. But not only is the money you give tax deductible, so are the amounts you spend on travel, parking costs and even convention and event fees that are related to the non-profit group, as long as you are not being reimbursed by the charity for these expenses.
Give this year — or wait?
There’s no simple answer, as the decision reflects both personal and financial considerations. But it’s worthwhile to keep in mind the following:
- Deductions are worth more in a higher tax environment.
- By deferring your gift into 2013, you may be able to increase its tax benefit, since the deduction would offset income subject to higher federal tax rates.
- But deductions may be limited.The calculation is complicated by limitations on the deductibility of charitable contributions.
o Charitable contributions are annually deductible only up to a percentage of a taxpayer’s adjusted gross income (AGI).
o They could be further limited by phase-outs of itemized deductions for high-income taxpayers.
o For high-income taxpayers, the Administration continues to seek to limit deductions to no greater than 28%, regardless of their actual tax bracket.
- Deductibility depends on your income.Another factor to consider is how much income you are likely to earn this year versus next year. If you are accelerating income into this year, for instance, to take advantage of lower federal income tax rates, you may be able to deduct a larger charitable contribution this year rather than next.
- Keep in mind the impact of Roth IRA conversions.If you took advantage of the opportunity to convert your traditional IRA to a Roth IRA in 2010, and the ability to spread your conversion income into 2011 and 2012 (or if you simply converted to a Roth IRA in 2012), you may incur a one-time increase in ordinary income. As a result, you must pay ordinary income tax on any pretax assets and tax-deferred earnings that you converted. So, it may make sense to accelerate your charitable contributions to this year to help offset the increase in taxable income resulting from this conversion.
- Use charitable strategies to minimize future Medicare surcharge taxes.By donating appreciated or income-generating property in your portfolio to charities now, you can not only benefit from an immediate income tax deduction, but also reduce your future investment income subject to the new Medicare surcharge tax, beginning in 2013.
- Consider the needs of the charities you support.Charitable donations have not fully recovered since 2008, and many organizations are still feeling the effects of a challenging economy. You may decide to give now rather than later, simply because the organizations you value need your support in difficult times.
Ø Giving to charity may improve your sense of well-being
The act of helping others can create an improved sense of well-being. Knowing that you sacrificed something such as time, finances or property in order to help others in need can give you a sense of purpose in life or work and inner satisfaction.
Ø Supporting a cause can help keep you informed about issues of social injustice
When considering donating to a charity, many people tend to research the issues connected to that organization. As a result, you become more educated about social injustices around the world. You may discover new points of view and opinions on topics about which you were previously uniformed. This knowledge may position you to help increase the awareness of social problems among those in your sphere of influence from a balanced and educated standpoint.
Ø Giving to charity out of spiritual conviction can strengthen your spiritual life
Selfless giving is a key component to many spiritual and religious belief systems. Recognizing that you have taken action in line with your spiritual beliefs by offering your resources to others in need can bring a sense of inner peace and contentment.
Ø Volunteering with a charity may result in physical and social benefits
After donating financially to a charity or non-profit organization, you may feel an inner pull to become more involved with the cause by donating your time and skill as well. By volunteering, you have the opportunity to build your social circles while reaping the physical, mental and spiritual benefits from the labor you contribute to your favorite cause.