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The federal government has creates a tax reduction program for people making donation to charities because giving money to charity provides many benefits to both the community and the donor, most people do not give much thought to developing a tax-effective strategy for charitable giving. Although many people make charitable bequests in their wills, other ways of giving may be less costly to them and their estates. In this article, we will focuses on the tax effectiveness of charitable donation for individuals.
1. Income tax incentive
The US and Canadian income tax system provides tax credits to encourage taxpayers to make gifts to charitable organizations. The system is designed to grant a tax credit at the top marginal tax rate. The actual tax credit may vary slightly depending on the states and provinces in which the taxpayer resides.
2. Eligible organizations and associations
The tax credit is available to taxpayers for donations to any of the following:
a) Registered charities . . . including universities and colleges.
b) Registered amateur athletic associations.
c) Non-profit corporations.
d) The United Nations and related agencies.
e) Registered national arts service organizations.
f) Federal debt servicing and reduction account.
g) Federal, state and provincial governments, crown foundations, municipalities.
h) Approved foreign universities.
3. How to claim the tax credits
In order to claim the tax credit, the taxpayer must file an official receipt indicating, a) The date on which donation is made
b) Receipts and registration number.
Donations should always be reported on the tax return for the year the gift is made. This applies to total donations including donation that exceed the annual claim limit. This helps to facilitate the tracking of any carry forward amounts and minimizes the risk of lost receipts. A taxpayer can report and claim a donation in any of five subsequent years subject to the annual donation claim limit.
4. Annual Donation Limit
A. Under the Income Tax Act, the annual general donation claim limit is 75% of yearly net income and either spouse can make the claim. Net income usually includes.
a) Employment
b) Pension
c) Interests, dividends and capital gains
d) Business income
B. However, there are certain amounts that must be deducted in calculating net income.
a) Registered Retirement Savings Plan (RRSP) and 401k contributions
b) Carrying charges and employment expenses
I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:
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