Year End Tax-Planning Using Charitable Contributions
As December 31 fast approaches, you might want to do some simple income tax planning. No one likes surprises after the first of the year when they prepare their tax returns.
How can I minimize my tax bill? If you are charitable person, one way to reduce your income tax is by making deductible charitable contributions. To deduct them in 2011, the payments by check or credit card need to be made before December 31, 2011. The same date applies to non-cash contributions, such as, clothing household items and vehicles.
How much tax can I save? The tax savings vary depending on your taxable income. You could save from 10% to 35% on the value of the contribution. The value for “cash contributions’, those made by check or credit card, is the amount of the check or charge. The value of “non-cash” is the value that the charity realizes when the item is sold. Normally an amount substantially less than the amount you paid when you purchased the item. However, you need to remember that there is a requirement for an appraisal for non-cash donations over $5,000 in value.
Bonus for Michigan Tax Credits (expiring 12/31/11). The State of Michigan provides a non refundable credit for 50% of the value, limited to $100 single or $200 married for each of the following types of charities:
- Michigan Public Charities
- Community Foundations
- Homeless Shelters
The Michigan charitable tax credits are a dollar for dollar reduction of the Michigan Tax.
Please contact us if you have any questions regarding year-end tax planning or would like to know how much you could save on your taxes by making a charitable contribution.
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Your readers may also be interested in what are called charitable remainder trusts. These trusts are used to place monies in trust for the benefit of the donor and the tax-exempt organization. Basically, the donor (and his wife if desired) can be paid an income from the trust for their lives or for a term of years. When this time frame ends the charity named as the residual beneficiary gets the balance in the trust. The advantage for the donor is that they reserve income to themselves and get a tax deduction in the year the trust is funded for the actuarial value of the residue going to charity. There are various types of charitable remainder trusts and the provisions can be fine tuned to meet various needs.
Finally there is something called a charitable lead trust, that works in the opposite way; the charity is paid first and for a number of years and then the balance goes to family or other non-charitable remainder beneficiaries.