Year-end giving moves, December 2010
Saturday, December 11, 2010
Ready to share your wealth? Part four of Don't Mess With Taxes' fourth annual Year-end Money Moves series is for you.
Today we look at giving options, charitable and otherwise, you should consider making by Dec. 31.
Know the IRS rules
Giving to your favorite nonprofit can produce valuable returns for it and you at tax time, as long as you follow the donation rules.
You must itemize to deduct gifts to charity. If you claim the standard deduction, which most taxpayers do, your generosity will help out your charity of choice, but you won't get any tax benefits.
Make sure the organization to which you give is one that meets IRS guidelines. Ask the group 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 IRS Publication 78, which lets you search online for your charity's tax standing.
Get receipts. In most cases, you don't have to send this substantiation to the IRS when you file, but you'll need the documentation if the IRS asks. Without it, your charitable deduction could be disallowed.
And, in keeping with this post's theme, remember that to claim a gift on your upcoming tax return, you need to donate by Dec. 31.
Give "good" goods
Every group will take cash. As far as the IRS is concerned, that means actual currency as well as checks and donations via credit card. But a lot of organization also accept gifts of property.
Just be sure that the items you give, such as clothing or household goods, are in good shape. Don't try to dump worthless items on a charity and then claim them as a hefty tax deduction.
Some folks tried that, so the tax code was changed to require such donated items be in good or better shape. If they're not, then the IRS can automatically disallow your deduction.
The key is to use the 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.
And if you find the stuff you planned to donate is in bad shape, dump that raggedly crap in the trash and send a check to your favorite charity instead.
Donate assets
When you rebalanced your portfolio (as suggested in investments installment of this series) did you find a stock that 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.
Be sure the donated asset is a long-term holding; that is, you've owned it 12 months plus one day. If you give away property held for a year or less, you can only claim a deduction on the price you paid for it.
Donate a vehicle
Donate a car, truck, boat or other motor vehicle you're not using and it, too, could be a tax deduction. There are, however, some additional rules you need to follow when making these types of charitable gifts.
Your actual deduction amount for automotive gifts depends not only on the vehicle's fair market value, but also on how the charity uses the vehicle. You can find details on the rules in IRS Publication 4303, A Donor's Guide to Vehicle Donations.
Give gifts to family, friends
Financial gifts are popular every holiday season; remember, green looks good in everyone's wallet and always fits!
Giving money also could be wise if you're looking to reduce your estate's eventual taxable value if you're concerned about estate tax issues. And yes, although details are still being hashed out as part of the pending tax cuts bill, some sort of estate tax will be in effect next year and likely for many more years to come.
You can give in 2010 (and 2011) up to $13,000 (or $26,000 for married couples) to as many individuals as you like or can afford. These gifts have no tax ramifications for either the giver or the recipient.
These gifts don't have to be cash. You can give up to $13,000 worth of appreciated securities to someone.
This might be a valuable strategy if, for example, your retired parents' income is low enough to allow them to take advantage of the current zero capital gains rate. Give them appreciated stock worth $13,000 now and they can sell it by Dec. 31 and not owe any capital gains.
The zero rate also is likely to be in effect next year, too, if Congress passes the tax cuts deal now being debated on Capitol Hill. Keep an eye on what happens there in these waning days of 2010. Your folks might not have to sell the asset so quickly.
Giving option for older donors
Speaking of watching what Congress will do regarding taxes, older donors should pay special attention.
For the last couple of years, individuals age 70½ or older were allowed to have money from an IRA sent directly to a charity. The option applied to both traditional IRA and Roth accounts, but it was especially welcomed by traditional IRA account holders who had to take required minimum distributions (remember those from the retirement segment of this series?).
Well, that option expired at the end of 2009. However, the pending tax cuts bill would reinstate the option to donate IRA proceeds.
When the IRA money goes straight to a charity, the contributed cash is not counted as taxable income to the IRA owner. That's good, since IRA distributions are taxed at the higher, ordinary income tax rates.
Of course, the donation option also means that the direct gift is not tax deductible. That, however, might not be that much of a disincentive, since many older taxpayers (like most taxpayers of all ages) do not itemize.
Well, that's it for giving. One more installment, on financial details, will be posted shortly.
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