I also took a blog side trip to say goodbye to the estate tax which, because of Senate inaction, will disappear on Jan.1, 2010. But it will(? should? might?) be back in early January. I'll let you know as soon as whatever happens.
Today, though, we are back, taking a look at some giving moves you should consider by Dec. 31.
This time of year, many of us are in the gifting mode. In addition to our family and friends, we deliver a little something to our favorite charities. When done according to IRS rules, our helping out of others can also be a perfect financial and tax gift to ourselves.
There are lots of opportunities here, so let's get started!
Know the tax rules
Uncle Sam encourages a charitable spirit, as long as you follow IRS guidelines.
Itemizing taxpayers also must be sure to give to an organization that has been vetted by the tax agency. Ask the group to which you give about its tax-exempt status. If it expresses surprise at the question or can't (or won't) provide you information, look for another place to donate. You also can check Publication 78 to ensure the nonprofit meets IRS standards.
Document your donations. A few years ago, a tax law change began demanding that you have a canceled check, bank record or an official receipt from the charity to verify your gift, regardless of how large or small it is. You don't have to send this substantiation to the IRS with your return, but if the IRS asks and you can't produce the document, your gift deduction likely will be disallowed.
And, in keeping with this post's theme, remember that timing is everything. To take advantage of a donation on your coming tax return, you need to make the gift by Dec. 31.
Giving away household goods
Donating household goods and clothing that you no longer need also can help out others as well as your tax return's bottom line.
Unfortunately, some folks were giving away crap under the guise of helping out others. Yes, I said it: Crap. And the only ones they were helping were themselves, by making inflated tax deduction claims regarding the worth of the items.
So lawmakers added a provision to the tax code that now requires any donated clothing or household goods be in good or better shape. If they're not, then the IRS can automatically disallow your deduction.
The key here is to use the true fair market value of your gift. There are several software programs that can help you figure this out, as well as IRS Publication 561, Determining the Value of Donated Property. You also might check out eBay to see what the going price is for an item you're giving to your local Goodwill or Salvation Army branch.
So be an ethical giver. Don't try to pawn off your crap on groups trying to help out others. No one wants your raggedly socks or slacks that are so worn you can literally see through the seat. If your goods are that awful, be honest and drop them in your trash can. Then send a check to the charity instead
The payoff of appreciated property
Did you rebalancing your portfolio as we discussed in the Investments installment of our Year-end Money Moves series? If you did (or will) and you discovered an asset no longer fits your investment strategy, it could be a perfect charitable gift.
As long as the asset has increased in value and you've owned it for more than a year, you can give it to a nonprofit and deduct its full fair market value. The charity then can use it and you avoid any capital gains tax on the asset's appreciation.
Again, make sure you've held the asset for the full 12 months plus one day. That makes it a long-term asset. If you give away property held one year or less, you only are allowed to claim a deduction on the price you paid for it.The value of vehicular donations
If you didn't cash in your clunker earlier this year, now might be the perfect time to get rid of that jalopy. By giving it to a charity, that vehicle could be more valuable as a tax write-off than what you'd get for it or its parts.
But in giving your vehicle away, you must make sure you follow the tougher rules that the IRS put in place several years ago. Unfortunately, some folks overvalued their auto donations (just like those ratty clothes they also gave away), so now the IRS has more complicated guidelines to assess the proper donation claim in these cases.
Your actual automotive gift tax break depends not only on the actual, fair market value of your vehicular donation, but also upon how the charity uses the car (or van or truck or motorcycle or even boat).
You can find details on the rules in IRS Publication 4303, A Donor's Guide to Vehicle Donations.
Older donors get a special opportunity
If you are 70½ or older, you can have money from your IRA sent directly to your favorite charity. The option is applies to both traditional IRA and Roth accounts, but it's probably more beneficial to traditional IRA account holders, since much of the money in these accounts is eventually taxable.
When it goes straight to a charity, usually in the form or the account holder's required minimum distribution, the contributed cash is not counted as taxable income to the IRA owner.
The big drawback here is that these direct gifts from an IRA are not deductible. That, however, might not be that much of a disincentive, since many older taxpayers (like most taxpayers of all ages) do not itemize.
This technically is the last year older donors will get this option. However, the House has passed a bill extending this direct donation, as well as several other expiring tax breaks. Expect final action in 2010 by the Senate to continue these laws for at least one more year.Keeping it in the family
Some taxpayers also will want to look at giving financial gifts to family (and friends) this holiday season, or at other times of the year.
In 2009, you can give up to $13,000 (or $26,000 for married couples) to as many individuals as you like or can afford -- and if you have an extra $13K to hand out, let's talk! These gifts have no tax ramifications for either the giver or the recipient.
And remember that this gift doesn't have to be cash. You can give up to $13,000 worth of appreciated securities to someone.
This might be something to think about if, for example, your retired parents' income is low enough to allow them to take advantage of the zero capital gains rate. Give them appreciated stock worth $13,000 by Dec. 31 and they can sell the asset any time this or next year and not owe any capital gains.
- 2009 Year-end Money Moves Part 1: Taxes
- 2009 Year-end Money Moves Part 2: Investments
- 2009 Year-end Money Moves Part 3: Retirement
- Some year-end tax moves to make
- The 12 Tax Tips of Christmas: #4 Be Charitable
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