If you donate to
charity, the taxman will smile on you. That said,
there are limits to the Internal Revenue
Service's philanthropic incentives. For
instance, if your adjusted gross income (AGI)
exceeds $139,500, your charitable tax
deduction--together with mortgage interest and most
other itemized deductions--is trimmed by 3 percent
of the excess amount. Say your AGI is $10,000 over
the limit; your total deductions shrink by $300.
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A money donation is the most straightforward way to
give help and get a tax break. But never give cash.
It's impossible to track, whereas a check or
credit card transaction can help authorities locate
fraudsters. If you give more than $250, you need
written acknowledgment from the charity. A canceled
check won't pass IRS muster.
If
you're an investor, consider giving appreciated
stock you've owned for at least a year. That
way you not only get a tax deduction for the
shares' fair market value, but you avoid the
capital gains tax payable if you had sold them.
"If you're looking for tax efficiency,
giving stock is clearly the best way to go,"
says Don Weigandt, a wealth adviser at JPMorgan
Private Bank. Which stock should you give? Weigandt
says, ask yourself: "If you were selling a
stock, which one would you sell?" But
don't drop a tanked stock on a charity. Not
only won't it help the recipient, but, notes
Jackie Perlman, a tax research analyst at H&R
Block, "If it's worthless, your deduction
is worthless."
Donor-advised funds became
hugely popular in the last decade, and most big
financial institutions offer them. You place assets
into the fund and get an immediate tax deduction
(and, again, if it's stock, you avoid a capital
gains tax). You then dole out the cash to charities
of your choosing.
Life trust. A trust offers
the further advantage of estate planning. The most
popular is the charitable remainder trust. You put
cash or shares in, and it pays you an annuity. At
death, the remainder goes to the charity. The
upfront deduction is the present value of the
estimated remainder, based on actuarial tables.
Donations of "stuff" to charities--used
cars, household goods, old clothes--offer tax
benefits. But be careful in assessing their value.
"This is where people get into trouble,"
Perlman warns. Software is available to help assess
the value of used goods. If an item is worth more
than $500, you need proof it was yours to give away.
If it's worth more than $5,000, it must be
formally appraised; for cars, Blue Book valuations
aren't acceptable.
Do volunteer work? By
all means deduct out-of-pocket expenses such as
supplies, cab fares, and mileage (14 cents a mile).
But get written acknowledgment of your hours. And
don't try to deduct the value of your time.
Finally, know thy charity. The IRS allows donations
only to authorized groups (IRS Publication 78 lists
them and is available online at www.irs.gov). If
you're looking for a tax break, Perlman says,
"you can't give to your Uncle Edgar. Even
if he is broke." -Thomas K. Grose
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