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Military Finances 101: Getting Charitable Ducks in a Row Thumbnail

Military Finances 101: Getting Charitable Ducks in a Row

Taxes

I think overall, military members, whether active duty or retired, are pretty charitably inclined. The holiday season tends to bring out our charitable instincts even more. If you are going to support charitable causes, then get the max tax benefit you can from it.

What is the Best Source of Funds for Charitable Contributions?

To be frank, most of us contribute to charity in the least tax effective way. We either stroke a check or have DFAS take funds out for CFC. There are much better ways to support charities.

One way is to donate appreciated assets. Let's say you routinely donate $1,000 a year to your favorite charity. You have a position in XYZ stock that has some sizable capital gains. If you donate that stock to charity, as long as you've held it for more than a year, your deduction is based on the Fair Market Value (FMV) on the date of the gift. So instead of writing a check to your favorite charity, give them $1,000 worth of XYZ stock. You'll get the full $1,000 deduction. Suppose you paid $800 for the stock. That's taxes on $200 you'll never pay, and the charity won't pay it either. What if you really like XYZ? Take the $1,000 cash you were going to give to charity and buy the stock back at the increased price. You'll still have $1,000 worth of XYZ and $0 taxes due on the $1,000 when you sell it.

If you're 70 1/2 or older and have an IRA, you can make contributions directly from your IRA to the charity. This is called a Qualified Charitable Contribution (QCD). In this case you don't get a deduction, but the QCD isn't included in your income. This reduces your Adjusted Gross Income (AGI) which is good thing. Reducing your AGI also reduces your taxable income even if you don't itemize deductions (which many seniors don't). Beyond that, reducing your AGI may make you eligible for other tax credits or deductions (medical expenses is one example).

What Documentation Do I Need for Charitable Contributions?

For cash contributions you need to maintain a record of the contribution which could be a bank record or a written communication from the donee (including name, date and amount). This applies to all cash contributions. If the cash contribution exceeds $250, you obtain a contemporaneous written acknowledgement of the contribution.

Non-cash contributions are a bit more complicated.

  • For contributions of less than $250 you need the name and address of the donee, the date of the contribution and a description of the property. If you donate securities add in the issuer, type of security and whether the securities are publicly traded.
  • For contributions of at least $250 and less than $500, the donee must substantiate the contribution with a contemporaneous written acknowledgement.
  • For contributions over $500 but under $5,000 all the above are required, and you must complete and file a Form 8283 with your individual tax return.
  • For contributions over $5,000. All the above are required plus you must obtain a qualified appraisal. You must also complete part B of the Form 8283

Is there a Limit to How Much I Can Contribute to Charity?

Yes, there are limits and they vary depending on what you contribute.

  • Cash contributions, under current law (2024), are limited to 60% of your AGI if you contribute to a 50% limit organization (most charities). The limit is reduced to 30% of AGI for other than 50% limit organizations which does include, notably, veterans' organizations
  • The deduction for appreciated assets (XYZ Corp as an example) is limited to 30% of AGI if donated to a 50% limit organization. The limit is reduced to 20% of AGI if donated to an organization other than a 50% limit organization

These are the basics. If you're getting close to these numbers, make sure you understand all the details of the limits.

Military Finances are Different

One of the great deals about being on Active Duty is all the tax-free income we receive. Your civilian counterparts don't receive them. And a financial planner or advisor primarily that works with civilian clients probably won't your benefits. That is why we think you should work with an advisor that works with Active and Retired Senior Military Officers and NCOs each and every day. If you'd like to find out how we work with clients just like you, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

How Military Officers Can Avoid Charity Scams


Retired Military Finances 201: Should You Make "Big" Charitable Contributions?


Retired Military Finances 101: How Much Can I Make if I Claim Social Security Early?


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