Maximizing charitable contributions

February 19, 2010

One of the most significant deductions available to a taxpayer is for charitable contributions.

Key Points

One of the most significant deductions available to a taxpayer is for charitable contributions. Giving to charity not only can help physicians develop their practices and give back to the communities that have supported them; it also can have advantages come tax time. The following is an explanation of some of the important aspects of this section of the tax code.

HOW TO MAXIMIZE DEDUCTIONS

The simplest method of maximizing the benefit of your charitable contributions is by controlling the transaction date. It's called "bunching," defined as the purposeful timing of deductions into the same tax year. This is effective in two ways:

2. If you anticipate dramatically higher earnings in one year, then bunching charitable deductions (and other itemized deductions) may be more effective in reducing tax on income that is in the higher tax bracket - much better for a contribution to be worth 33 cents to the dollar in tax savings, compared with 28 cents.

WHO CAN RECEIVE DEDUCTIBLE CONTRIBUTIONS?

Contributions are deductible only if you give them to a qualified charity. These organizations usually fall into the categories of religious, charitable, educational, scientific, literary, government, and others whose purposes are considered not profit-motivated and also beneficial to the public. These organizations must be located in the United States; however, charities based on Mexico, Canada, or Israel are eligible if they are recognized by their own country's government and if the contributor has income in these nations. If they are based in any other country, then they must have operations in the United States or its territories, and the contributions should be made to their U.S. office. This arrangement allows a work-around for any international charity that wants to provide tax-deductible contributions in full to a U.S. donor.

WHO CANNOT RECEIVE DEDUCTIBLE CONTRIBUTIONS?

Although anyone can contribute to any legal cause or help someone in need, not all such gifts will qualify as deductible contributions. Several limitations to this effect:

1. You cannot deduct contributions from which you derive a benefit. For example, if you donate to a charity and thereby obtain the privilege to attend a show, sporting event, or other activity, the deductible portion is that which exceeds the fair market value of admission to the event. Similarly, if you receive books or other products as a result of your gift, the deductible portion will only be the excess of the gift over the value of the item received.

2. You cannot deduct contributions to individuals. Often, those who have immigrated to the United States wish to send money to family in their home country. These types of gifts are not deductible even if done for a worthy cause, because they are not given to U.S.-based charities or the equivalent in Canada, Mexico, or Israel. Nor can you make a deductible donation to an organization that specifically benefits an individual or group of individuals. For example, a gift to a church or relief organization that is specifically designated for a specific individual is not deductible. Neither is a payment to a hospital for the expenses of an individual deductible, unless that person is your dependent.

3. You cannot deduct the value of your services and personal expenses. Many physicians participate in medical mission work. For example, after January's earthquakes in Haiti, many providers gave their time and expertise to help the people of Haiti during this crisis, as many did during the Gulf Coast hurricanes of 2005. The expenses incurred in traveling, equipment, and other costs are deductible, but the value of your services is not. There must be a receipted transaction for the deduction, which also precludes blood or organ donations. Additionally, you must provide these services through a qualified charity for them to be deductible. Offering services individually does not qualify. Personal expenses also are not deductible. For example, the cost of meals while performing charitable work is not deductible unless you are required to be away from your home overnight.

4. You cannot deduct property that is subject to a debt or with retained interest. A non-cash donation in which the recipient assumes a debt is only deductible for the amount in excess of the debt. Additionally, any property interest you retain after the donation requires that the deduction be allocated between the relinquished and retained rights.