Tis the season to give generously, gratefully, and wisely. And when it comes to giving wisely, it’s important to understand some basic IRS rules governing gifts and tax deductions.
First, there are no deductions for gifts of time or talent. If I provide free financial planning services or make a retirement planning presentation at a church, I cannot deduct these services on my tax return. The same rule applies to painters who give the gift of a newly painted room. No deduction for painting services rendered; although hard project costs such as paint and materials can be deducted.
Deductions can be taken for gifts made to charitable entities recognized by the IRS as a 501c3 organization. While not every church maintains a 501c3, churches are
the only exempt organizations that allow you to share your gift and also receive a charitable contribution deduction on your tax return.
What about deducting gifts to individuals? No deductions apply here either. However, under annual exclusion rules, you can give up to $14,000 annually to your children—or for that matter to any individual in the U.S. The only catch is the gift has to be of
“present interest” meaning there are no strings attached when it comes to how the recipient uses the gift. Under current exclusion rules, even larger gifts can be made directly to educational institutions or medical facilities. But again, no tax deductions apply.
Perhaps you want to give a gift to help an individual or family down on their luck. As stated above, it is perfectly legal and tax-free to give up to $15,000 per person annually. So for a family consisting of two parents and two children, you could make four individual $14,000 gifts.
While such expressions of generosity are welcome and often needed, not to mention appreciated by the recipients, remember that you will not be able to deduct charitable gifts made to individuals on your tax return. Faced with this reality, one strategy is to identify a church that shares your compassion. If you give the money to the church and let the church use the funds to help a family in need, you can claim a tax deduction. A win-win! Many churches will be happy to facilitate your generosity, although they may want to spread the gift among families.
The IRS goes back and forth on whether you can use your required minimum distribution (RMD) from IRA and 401k accounts to fund charitable gifts where you recognize no income or deduction. As a general rule, anything that reduces your taxable income is better than adding a deduction, so gifting from your RMD is a smart approach. Not every tax filer can itemize so the gift may or may not benefit your tax return, and using RMD funds may even reduce taxation on your social security benefits.
Beyond paying for food, shelter, and life’s necessities we all work for different reasons. Let’s make sure we share our blessings in the wisest manner.
Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. Contact Joe at yourlifeafterwork.com or 800-928- 4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated. World Equity Group, Inc. does not provide tax advice.