Year-End Tax Tip:  Donations

Charities count on our support at year end. Not only is donating to a worthy cause the right thing to do, but digging deep to help others also makes good sense from a year-end tax planning point of view, especially for young, high-income earners.

That’s because starting in 2016, higher earners get a better tax benefit.

Prior to 2016, the non-refundable tax credit rate for donations over $200 was 29% (under $200 the rate was 15%). Until the end of 2017, an additional 25% is added to both the 15% and 29% tax rates for the First Time Donor Super Tax Credit.

However, as a result of the tax rate increase for 2016 and subsequent years, donors who earn more than $200,000 pay more taxes, but also get more of a break on their donations. The donations credit rate for donations over $200 is 29% if the taxpayer’s income is less than $200,000 and 33% on the lesser of donations in excess of $200 and the taxpayer’s income in excess of $200,000. Here’s how that’s going to work in an example:

William is a first-time donor. He has taxable income of $205,000 and he makes a charitable donation of $10,000 in cash. His credit is:

• 15% of the first $200, plus
• 33% of the lesser of the gift over $200 (that’s $9,800) and his taxable income over $200,000 (that’s $5,000), plus
• 29% of the remainder (that’s $10,000 – $200 – $5,000 = $4,800), plus
• 25% of the first $1,000, as William qualifies for the First Time Donor Super Credit, which is available for tax years 2013 to 2017.

Therefore, his total federal credit for 2016 is $3,322. That’s ($200 x 15%) + ($5,000 x 33%) + ($4,800 x 29%) + ($1,000 x 25%) = $30 + $1,620 + $1,392 + $250 = $3,322.

Bottom line? It’s time to step up and give generously, especially if you’re a high-income earner in 2016. Be sure to use the Knowledge Bureau’s Income Tax Estimator to try some “what if” scenarios to help you optimize your giving this year.

Next time: DONATING PUBLIC SHARES WITH ACCRUED GAINS

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