We donate to our favorite charities to support their missions and to help those in need. And of course, we all understand that donations to worthy causes can reduce our tax bill.
Individual Making Donation:
As an individual, the first $200 of donations saves you about $43 of taxes and any donations in excess of $200 will save 46 cents for every dollar donated. Any un-deducted donations may be carried forward for five years. In general, it is most tax beneficial to combine the spouse’s donations in either one’s personal tax return rather than each individual claiming their own donations. Remember, you may not deduct donations made by any other family members on your own tax return. This means your child might not enjoy any tax benefit if he/she donates and makes/expects to make no income or insufficient income to claim the donations.
Have you thought of donating in kind (e.g., furniture, dental equipment, kitchen cabinet, tax shelter and publicly traded stock, etc.); this may save you taxes. You will receive donation receipts equivalent to the value of the item donated. Rather than dumping the old kitchen cabinet in the landfill, you could donate it to Habitat for Humanity or any worthy charity and receive a donation receipt.
How about those publicly traded shares that have risen in value? What if you donate these shares instead of the net cash you received from selling them?
Based on the above examples, you would have saved an additional $30,568 ($46,400 – $15,832) by donating the shares directly.
Donating shares which have risen in value is better than selling these shares and donating the cash received from the sale.
Corporation vs. Individual:
Having your Professional/Technical/Hygiene Service Corporation make the donation is better than you making the donation personally.
Assume your corporation pays tax at 50 per cent on non-professional income (e.g., capital gains on investment or interest income) and pays tax at 18.62 per cent on professional income. Using the same examples as above, except your corporation makes the donation:
By having your corporation donate the shares directly, you would have saved an additional $12,520 ($18,620 – $6,100) which appears to be far less than if you donate the shares personally. However, when your corporation donates the shares, you (the shareholder) may also receive a tax free dividend of $45,000 in example 3. This represents the non-taxable portion of the capital gains. Such a dividend may have cost you $14,100 ($45,000 x 31.33%) of taxes if it is a taxable dividend and you are at the top tax bracket. With this tax free dividen, your tax saving is now increased to $20,200 ($6,100 +$14,100).
On the other hand, if you donate the shares directly to a charity, you may receive a tax free dividend of $90,000 and the equivalent tax saving is about $28,200 ($90,000 x 31.33%). The gross saving is now increased to $46,820 ($18,620 + $28,200).
It is slightly more beneficial to donate via your corporation instead of you personally donating, as demonstrated by the above examples.