Pop quiz time! An affluent member of your congregation is touched by the hardships of a family in your community and wants to use her financial resources to assist the family. The most tax-savvy way for your compassionate congregant to help is to:
A.) Offer the family free counseling services. She can deduct the price of the fees from her tax return.
B.) Write the family a big check and make it payable to the head of household.
C.) Write a check payable to your church and specify that the funds assist the family in need.
D.) Pray that the family will get a really big tax refund from the IRS.
First, there are no deductions allowed for gifts of time or talent. If an individual wants to use her gifts to offer free counseling services or paint a home, she cannot deduct the value of the services from her tax return. However, materials such as printer paper and paint can be deducted.
The congregant could make a check out to the family in need, however, the gift could not be reported as a charitable deduction on a tax return. A better option would be to have the congregant make the check out to your church and designate the funds to help the family in need. Tax deductions can be taken for gifts made to charitable entities recognized by the IRS as a 501c3 organization, but rarely does this designation apply to a family. Churches are the only exempt organizations that allow individuals to share their gifts and also claim a charitable contribution on their tax return. No deductions apply when it comes to giving gifts to individuals.
But wait...there’s more to consider. Under annual exclusion rules, individuals can give a tax-free gift of up to $14,000 annually to any individual in the U.S. The only catch is the gift must be of “present interest” meaning there are no strings attached when it comes to how the recipient uses the gift. Perhaps a member of your congregation wants to help an individual down on her luck. It is perfectly legal and tax-free to give up to $14,000 per person annually. A congregant could give $14,000 to each member of the family under the exclusion rules, but remember that tax deductions do not apply and the recipient can use the gift for any purpose. Designating a charitable activity like a family emergency fund, as opposed to designating an individual, presents no legal difficulties.
Faced with this reality, an effective strategy is to align an individual’s benevolence with a church that shares compassion for the same cause. Giving the money to a church allows an individual to help a family or person in need and claim a tax deduction. Your church may choose to share a gift with multiple families or persons in need.
The tax code is perpetually evolving and a certified financial planner or CPA can help members with IRA and 401(k) accounts determine if their required minimum distributions should be used to fund charitable gifts. Beyond paying for food, shelter, and life’s necessities, people work for different reasons. Some thoughtful consideration can ensure that blessings are shared in the wisest manner.
More information on gifts and taxes is available at https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.
Expert Source: Joe Clark, CFP, Financial Enhancement Group and host of “Consider This”