When you make gifts to charities you not only advance the good work of the charity, but you can also save on your taxes. What you give as well as when and how you make that gift make a difference as to how much you can save. Knowing the details gets you the most tax benefit from your gift.
Gifting by Check or Credit Card
Writing a check to your favorite charity is one of the easiest ways to giving. The IRS considers that you have completed the gift as soon as the charity receives your check not when the check clears your account.
Using your credit card is another easy method. It can also be the quickest way if you make a gift over the phone or via the charity’s website. The credit card transaction date is the date of the gift, even though the charge does not appear on your credit card bill until a month later.
To be able to deduct your charitable gift on your 2007 tax return, the charity must receive your gift on or before December 31. The IRS requires the charity to send you a gift receipt that includes the amount and the date the gift was received for any contribution over $250. Many charities also send an acknowledgement for lesser amounts.
Even though using a check or credit card are the easiest ways to make a gift, you receive a tax deduction only if you itemize all of your deductions on Schedule A of your federal income tax return. If you don’t itemize, you won’t receive any tax benefit.
Gifting Appreciated Assets
If you make a gift of something that has grown in value, like stocks or mutual funds, you receive the same tax deduction as you would for gifting cash. But you can also avoid paying capital gain tax. By gifting, rather than selling, appreciated assets you eliminate the capital gain tax that you would have to pay if you had sold the asset.
An appreciated asset is anything that you purchased for less that it is currently worth. It could be real estate, a work of art, an investment security, or any other property that you own. When you sell an appreciated asset, you have to pay a capital gain tax on the difference between what you sold it for and what you paid for it. The current capital gain tax rate is 15% for taxpayers in the higher tax brackets. For taxpayers who pay ordinary income tax at the 15% or less tax rate the capital gain tax rate is 5%.
When you gift appreciated property you will have to verify the gift’s value. Determining value of appreciated stock or mutual fund shares is easy because all you have to do is check the daily stock market report. The value of any other asset, such as real estate or artwork, requires a third party appraisal.
Once you determine the fair market value, you need to transfer or re-title the asset from your name to that of the charity. Shares of stock or mutual funds are the easiest to transfer directly from your brokerage account to the charity’s account. If you hold the securities in certificate form, you will need to have the certificate re-titled, which will greatly lengthen the processing time.
Charitable Giving from your IRA
If you are 70 ½ years of age or older, you can also make gifts to charitable organizations from your Individual Retirement Account (IRA) up to $100,000. You have to make the charitable contribution directly from your IRA to the charity. Therefore, you need to notify your IRA custodian to make the charitable contribution on your behalf.
You can get the most tax benefit by making charitable gifts from your IRA. You don’t have to pay income tax on funds you distribute from the IRA to a charity because those funds are excluded from your taxable income for the year. The contribution to the charity can also qualify as part or all of the IRA required minimum distribution. Regular distributions from an IRA are taxed as ordinary income at rates ranging from 10% to 35%. By gifting these funds to charity, you are never required to pay income tax on the distribution. This is better than paying tax and receiving a charitable deduction for most taxpayers.
You won’t have this charitable giving option after December 31, 2007, unless Congress extends this special provision.
Getting the Most Tax Benefits
Here’s a priority list of methods of giving to give you the most tax benefit:
1. Distribution from IRA (for those who qualify).
2. Gift of appreciated assets directly to a charity.
3. Cash, check or credit card transaction.
Making a charitable contribution can be as easy as writing a check or as complex as valuing and transferring appreciated property. Since gifting strategies may impact other areas of your overall financial plan, you may also want to secure the profession assistance of a financial planner to analyze the best method of giving for you.
Elaine Bedel, CFP®, is a personal financial planner with over 25 years of providing financial planning and investment management for executives, professionals, and entrepreneurs. She is the President and Owner of Bedel Financial Consulting and has served as Chair of both the Financial Planning Standards Board and Certified Financial Planner Board of Standards.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.