Wed, December 24, 2008
Year-End Charitable Deduction Thoughts
I’ve already written elsewhere about year-end tax minimization strategies. With a little more than a week left in 2008, time is drawing short for carrying out many of them. Here's something you still have time to do: charitable giving.
Most of the actions that you can take to reduce your tax liability must be completed by December 31st (the major exception to this is traditional IRA contributions, which can be made until April 15, 2009). One useful trick, if the charity of your choice accepts credit cards, is to charge your gift before yearend. Even if you don’t pay the bill until 2009, a charge made this year is a deductible gift.
Here are several things to keep in mind if you pursue this option as a tax reduction strategy:
The most important, perhaps, is to remember that you may only claim charitable contribution deductions if you are eligible to itemize your deductions. If you’re concerned about having enough deductions to qualify for itemizing, one solution is to “bunch” two years of giving into a single year. Although no one knows for sure, the odds are good that income tax rates won’t be increased in 2009 because of the recession, so pulling your deductions into 2008 seems like a good strategy.
In order to deduct a charitable gift of any amount, you must have one of two things: a written communication from the charity indicating the name of the charity and the date and amount of the gift, or a bank record of the gift. Acceptable bank records include cancelled checks, bank statements, or credit card statements. For donations made via payroll deductions, you should keep a pay stub or other document showing the amount withheld along with the pledge card showing the name of the charity. In addition to the above requirements, for any donation (property/money) of $250 or more, the IRS still requires that you must have a written acknowledgement from the charity. A single statement may meet both requirements if it contains all the required information.
Donated clothing and household items must be in “good used” condition or better to be deductible. An exception to this rule is an item for which you claim a deduction in excess of $500; in this case, you must include a qualified appraisal of the property with your return.
Deductions for donated motor vehicles, boats or airplanes with values in excess of $500 are now limited to the gross proceeds received by the charity from the sale of the vehicle. The charity must provide you with a copy of Form 1098-C or comparable statement to file with your return.
If your total deductions for non-cash gifts exceed $500, you must complete Form 8283 and file it with your return.
If you’re considering giving a stock or other security to a charity, be sure that it you have a capital gain, not a capital loss, on the security. It’s advantageous to you to give a security that has gone up in value, because you get a deduction for its full value without selling it and realizing the gain. But if you have a loss on a security, you’re probably better off selling it outright (if you wish to dispose of it) and taking the loss to offset other capital gains or ordinary income. You can use capital losses to offset up to $3,000 in ordinary income per year, and any unused loss can be used in later years.
In order for your gifts to be deductible, the recipient organizations must be IRS-qualified. IRS Publication 78, available online, lists most qualified charities. In addition, churches, synagogues, temples, and mosques are generally eligible even if they are not listed.
It’s not yet clear how the recession has affected charitable giving, but it seems likely that many charities will see increased need for their services in the coming year. This is probably the best reason of all to make a year-end gift to a qualified charity if you can afford to do so.
The advice given here may or may not be appropriate for your individual situation. As always, tax strategies should be discussed with a qualified tax adviser before doing something that you can’t undo.