23 Feb Keeping track of your charitable donations is more important than ever
When the Inflation Reduction Act was signed into law in August, many taxpayers were relieved that the Act did not include heavily-debated proposed tax hikes that were so prominent in early versions of the legislation. What’s weighing on a lot of taxpayers’ minds, however, even more heavily than the few changes to income tax rules, is the Act’s $80 billion in funding increases for the IRS.
The IRS will use the money to shore up its staffing, technology, and, notably, enforcement efforts. The additional capacity means that the IRS’s customer service should improve. It also means that the chances of audits almost certainly will increase.
A well-known trigger factor for audits is a list of charitable deductions that looks out of whack. It is very important to understand the rules for charitable deductions and keep track of your donations in detail.
Establishing a fund at the community foundation is an easy way to organize and track your charitable giving. Perhaps you and your family already take advantage of this feature by making a single, tax-deductible transfer of highly-appreciated stock each year to your fund. If you are deploying this tax-savvy technique, you know that the proceeds from the sale of the stock–free from capital gains tax–are then used for distributions from the fund to support your favorite charities. No matter how many different charities receive support from your fund, you still have just one receipt to keep track of charitable donations for income tax deduction purposes.
The community foundation offers different types of funds for different types of giving. We’ll work with you to set up a fund to meet your specific needs. Many of our donors have even established two or more separate funds to fulfill different goals.
Available types of funds include:
Donor-advised fund. A donor-advised fund enables you to establish a dedicated account for charitable giving. You make tax-deductible contributions of cash or other assets to the fund, and then you are able to recommend grants to favorite charities.
Unrestricted fund. The community foundation has its finger on the pulse of the community’s most pressing issues. An unrestricted fund gives you the opportunity to support community needs that can’t be identified until the future. One of the biggest benefits of a community foundation is its perpetual structure that allows you and your family to offer support to nonprofits that evolves over time as priorities in the region shift.
Field-of-interest fund. If you would like to target your giving to specific areas of community need (such as education, health, environment, or the arts), you can create a field of interest fund to establish parameters for grant making under the ongoing guidance and expertise of the community foundation’s staff.
Designated fund. A designated fund allows you to direct your giving to a specific nonprofit organization. Over time, the community foundation’s staff manages the distributions from the fund according to the terms you’ve established.
Any of these funds enables you to organize your giving for tax purposes, which helps you stay prepared in the event of an IRS audit.