How To Make the Most of Giving
If you pay attention to the tax code you - and your charity - will get the most out of your contribution.
If donating to charity is high on your list this holiday season, get the tax considerations right to make the most of your gift.
Charitable giving totaled an estimated $295.02 billion in 2006 – a record high, the Giving USA Foundation reports. That's about two percent of the nation's gross domestic product and represents the highest percentage share in the world. About two-thirds of the gifts were from individuals, T. Rowe Price reports.
"It's important to get a receipt for your donation for tax purposes," says Ann Boyce, president of T. Rowe Price's Program for Charitable Giving. "Your check is a record of your donation. You also should have a receipt from the organization and a statement that you received no personal benefit from the gift."
The IRS offers the charitable deduction to encourage giving. Here's how it works:
For deductible donations, the tax savings reduces the cost of your gift. If you're in the 33% tax bracket, the cost of a $100 contribution is $67, or $100 less $33 in tax savings. If you're in the 15% tax bracket, the cost of a $100 donation is $85, or $100 less $15 in tax savings.
T. Rowe Price offers two examples for larger gifts made through its program for charitable giving for those in the 35% tax bracket:
If you sell stock and donate the proceeds to charity, assume a purchase cost of $40,000 and a current market value of $100,000 creating an unrealized capital gain of $60,000. That means you pay $9,000 in capital gains tax, donate $91,000 and receive a federal tax deduction of $31,850.
The tax savings is greater if you assume the same purchase cost and current value, but donate appreciated stock instead of cash to charity. This means there is no capital gains tax. If you take this tack instead of donating cash, the federal tax deduction jumps to $35,000.
"When you've reached the point where it makes sense to give an asset other than cash, it's time to talk to a tax advisor," Boyce says.
The real cost of a charitable gift falls as your income tax bracket rises. The theory: People with higher incomes have more money to donate to charity and therefore receive more incentive to do so.
Contributions must be made to "qualified" organizations, including religious, charitable and educational, as defined by section 501(c)(3) of the Internal Revenue Code. That's bureaucratic gobbledygook to most of us. Luckily, the IRS Web site, www.irs.gov, has a search feature that can help you determine if an organization meets federal guidelines for a charitable deduction.
A contribution to a qualified charitable organization is deductible in the year it's paid. Date and mail your checks by December 31 to claim the charitable deduction for that year.
File Form 1040 and itemize your deductions on Schedule A to deduct charitable contributions. If you make a cash contribution, the deduction is limited to 50% of your adjusted gross income. The limit drops to 30% for gifts that have increased in value and have been held more than one year such as stock, but the excess amount can be carried over for five years.
Be sure to substantiate your contributions by keeping accurate records. Thanks to the Feds, this creates more paperwork for everyone. It may also mean contributing to your church or synagogue quarterly so you can get a receipt rather than tossing money in the collection plate each week. Be sure the receipt includes the date of the contribution and the amount donated.
Under new rules adopted by the IRS last year, written records prepared by the donor such as check registers or personal notes are no longer enough to support charitable contributions. The IRS now requires bank records such as canceled checks, bank statements or credit card statements to establish a charitable donation. The records must include the name of the charity, amount paid and the date of the transaction. If you donate by payroll deduction, a pay stub, W-2 or other record provided by the employer is required to establish the deduction.
If you donate used items such as clothing, furniture or household goods, your deduction is limited to the fair market value of the items, or the amount someone would pay for them at a thrift shop. Warning: Many people overstate the value of their donation and this can create problems with the IRS.
If you perform volunteer work at a charitable organization, you can't deduct your time, but you can deduct out-of-pocket expenses such as postage and supplies. If you drive your car as part of your volunteer work, you can deduct 14 cents a mile as well as any parking fees and tolls. Overnight lodging and meals are also deductible if directly related to your volunteer work and not part of a vacation.
Be aware of what the IRS calls "quid pro quo contributions." If you donate $100 to a charity and receive a concert ticket or meal valued at $40, you've made a charitable contribution of $60 that can be deducted from your taxes. The charity should give you a written statement of the value of your contribution for tax purposes.
If you donate property valued in excess of $5,000, be sure to get an appraisal prepared by a qualified appraiser. This could include antiques, paintings, jewelry, gems or a stamp collection. This requirement doesn't apply to publicly traded stocks or bonds.
Finding a qualified appraiser can be tricky. If you're donating art work, contact a museum in your city and ask for a referral. A good appraiser will peg the value of your artwork to the recent sale of similar pieces.
If you pay attention to the tax code you – and your charity – will get the most out of your contribution. The beauty of charitable giving is that it allows you to give and receive simultaneously.
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