The Business Of Giving: Tax Benefits
It pays to be charitable.
Once you've chosen a charity with a mission you want to support -- and you're happy with its work, outcomes and financial stability based on the guidelines and tools outlined in my last column -- your next step is what and how to give.
Naturally, all non-profits appreciate simple cash donations, but there are other options that may not occur to the novice giver. As you invest and disinvest -- that is, buy and shed property during the year -- you should consider the tax benefits of donating clothing, household items, real estate and securities. Some donations will be subject to special rules, but you can generally deduct the fair market value of the property at the time of contribution.
What are the tax benefits of giving?
The actual cost of the donation is reduced by your tax savings. For example, if you're in the 33% tax bracket, the actual cost of a $1,000 donation is only $670 ($1,000 less the $330 tax savings). At higher income brackets, the actual cost of charitable gifts is lower, making contributions even more attractive.
There may be a significant tax advantage to contributing "capital gain property," including capital assets held for more than one year (for example, securities, real estate, jewelry and artwork). It works because you can generally deduct the current fair market value of the property. According to Giving USA 2007:
Stock gifts make sense during weak markets, too. Some donors find it helpful to purge their portfolios of nonperforming stocks, either those with low dividends or where value has fallen. Donors who sell these stocks themselves, then give the proceeds of the sales to [the] institution, get a tax benefit from a capital loss (if the stock sold below the donor's cost basis) and a charitable deduction for the by-then cash contribution.
How much can you deduct?
You don't need to worry about limits unless you're contributing more than 20% of your adjusted gross income (in which case I hope you have an experienced tax accountant to assist you). Deductions can range as high as 30-50% of adjusted gross income in special cases, and there are rules governing carryover deductions for future years.
What about events and benefits?
Many charities hold events such as gala dinners and golf outings. Per the IRS, if you receive something as a result of making a contribution to a qualified organization, you can only deduct the amount above and beyond its value. As an example, you may receive a tax deduction receipt for $650 for the $1,000-per-plate fundraising dinner you attended. The charity will have deducted $350 for its out-of--pocket expense for your meal and any entertainment provided. The (greatly appreciated) balance of $650 is the amount the charity will use to support its programs.
This same rule applies to fundraising auctions: You can only deduct the amount that exceeds the value of the item you won. If you bid $500 for a painting that's valued at $500, you don't get a tax deduction. However, a $750 bid would generate a $250 deduction. Keep in mind that most auction items are either donated or provided at a lower consignment price, so the benefiting charity will receive most, if not all, of your auction bid. Charities can't provide you with a donation receipt for the full amount you spent - otherwise the IRS would come knocking on their door right before knocking on yours!
How does recordkeeping work?
Cash contributions can only be deducted if you have a copy of a bank record (canceled check, detailed statement or a written communication from the charity). You must obtain written documentation from the charity for any single donation of $250 or more. All charities are aware of the IRS regulations and will automatically issue donors a receipt for contributions in this range; they will typically issue receipts for smaller amounts as well.
Whatever and however you choose, remember to give. By doing so you're strengthening our society and underwriting our ability to grow, thrive and succeed.
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