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Charity begins at home, but for many Americans it extends much further. People donate to charity for many reasons. Some folks donate to charity out of a moral obligation, others donate for income tax and estate tax reasons, and many people donate for both of these reasons.
When we discuss donating to charity we’re not talking about paying your 25 year-old son’s rent. Admittedly it might feel like charity, however the Internal Revenue Service would beg to differ. In order for a donation to be considered charitable, the donation must be made to a “qualified” organization pursuant to Section 170 (c) of the Internal Revenue Code. Furthermore, the donation must be made in the form of property. There is no deduction available for donating your time to such an organization.
The tax implications of making a donation to a qualified charity are friendly to both the donor (the person making the donation) and the donee (the organization receiving the donation). The government acknowledges that as a society we want people to contribute to charities because charities do good work for the community. When people donate to charity it eases the burden on the government to provide the services that benefit society as a whole. Charities often can react faster, and more effectively utilize the resources available than the government, which is often bogged down with red tape.
Besides making you feel good, the immediate effect of making a donation to charity is that it reduces your income tax, because it qualifies for an income tax deduction. There are also other tax benefits associated with charitable giving. There is no federal gift tax due on the transfer, irrespective of the amount of the gift. Furthermore, charitable giving is often utilized to reduce estate taxes, with the deduction only being limited to the size of the donation. Wouldn’t you want your money to go to charity before going to the Internal Revenue Service? The final tax benefit goes to the qualified organization receiving the donation, and generally speaking no income tax is paid by the qualified charity on the donation. So as you can see, it certainly makes tax sense to give to charity.
There are some kinds of giving that can directly benefit those around you and have a positive effect in a tax sense. The Internal Revenue Service allows people to give gifts up to certain amounts per person per year. You can give this amount to any number of people. This has the effect over time of reducing a person’s taxable estate. The IRS also allows a person to pay another person’s medical expenses or educational tuition gift tax free, as long as these monies are paid directly to the institution. This also has the effect of shrinking the estate, and thus limiting the estate tax exposure.
In the estate planning sense the object of charitable giving is to shrink your estate in order to limit your estate tax exposure, while at the same time benefiting society at large. Charitable gifting in the income tax planning sense may reduce the size of your taxable income. Whatever the reason for giving, keep on doing it. Most of the charities are doing good work making our world a better place to live.
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