The end of the year offers many opportunities to give financially to charitable institutions who need your help. While your generosity is likely motivated by your internal drive to do good for others, it can also provide your freelance business with valuable tax deductions, creating a win-win situation.
To ensure your charitable contributions are working double-time--for your favorite causes and your freelance business--keep these tips in mind:
Contribute to eligible charitable organizations
To qualify under the IRS guidelines, any contributions you make that you plan to deduct must be made to registered charitable organizations with 501(c)(3) tax exempt, status. Donations to individuals will not qualify. If there is a donation you want to make to an individual, you may be best off working through an established charitable organization that can offer support to that person such as the Red Cross or Salvation Army. Political donations aren’t deductible either.
Donating cash is an easy deduction
Gifts of cash including donations made by check, credit card and payroll deductions, are the most straightforward way to give. However, to be able to use them as tax deductions, you must substantiate them with a canceled check, credit card receipt or a written receipt from the charity if they’re under $250. If your contribution is more than $250 you will need a letter from the organization showing their 501(c)(3) status and the details of your gift.
Know how tax reform impacts charitable giving
The Tax Cuts and Jobs Act (TCJA) has brought about many tax changes. One of the biggest for individuals is the change to itemized deductions. All charitable contribution deductions must be itemized, but unless your total deductions exceed the new $12,000 individual standard deduction threshold ($24,000 for married couples filing jointly) you may not be able to claim a specific tax benefit for charitable giving. Given that starting in the 2018 tax year the deduction for state and local income, sales, and property taxes is capped at $10,000, it may be even more difficult to reach the threshold where you can deduct your charitable giving.
Another change is that under the new tax reform laws, deductions for cash gifts to public charities can’t exceed 60 percent of your adjusted gross income (AGI). This is an increase from the previous 50 percent of AGI limit. The AGI limit is 30 percent for cash donations to nonoperating private foundations. If you do have contributions in excess of these AGI limits, they can be carried forward for up to five years.
Make your donor decision later—but take a tax deduction now
For freelancers who are interested in making charitable contributions now but who have not yet identified the organizations they want to support, a donor-advised fund (DAF) may be worth considering. This type of fund is offered by many large public charities.
One of the big tax advantages of this type of donation is that you receive a tax deduction in the year you make your donation, even if the funds aren’t immediately divested by the fund to specific charities. You can donate cash, stocks or non-publicly traded assets like real estate and private company stock to a DAF and your contribution can grow tax-free while you're deciding which charities to support. The charitable organization where your account is held is responsible for doing due diligence and recommending IRS-qualifying charities that your funds can support. It must also provide you with written acknowledgment of its legal control of the assets you contributed in order for you to qualify for the tax deduction.
Contribute by year end to improve your 2018 tax situation
For your charitable donation deduction to lower your tax burden this coming April, the gift must be made by Dec. 31, 2018. Under the IRS rules, a donation is generally considered to be made at the time of its “unconditional delivery.” This “unconditional delivery” date varies based on what and how you contribute to a qualified organization. For checks it is the date you mail them; for a contribution via credit card it is the date the charge is made. If you choose to donate another asset such as a stock certificate, the delivery date is when you mail a properly endorsed stock certificate to the receiving charity.
Now is the time to make charitable contributions work double time
With the season of giving upon us, don’t delay supporting your favorite tax exempt 501(c)(3) organizations before the clock chimes in the New Year. Be sure to get a receipt for your contribution so that you can itemize it on your tax return (as long as your deductions will not exceed the new larger standard deduction that you’ll see on your 2018 return). Most importantly, enjoy the feeling that comes with knowing your contribution will be helping to make a positive change in the world.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancers Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available March 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.