Friday, December 13, 2013

Tax-Smart Ways to Give

Kimberly Lankford for Kiplinger writes: People who itemize their deductions generally scramble to write checks before New Year’s Eve so they can deduct the contributions on their tax return for the year. But there may be more effective ways to give.
Donate appreciated stock. It’s been a good year for the markets, and some of your investments may have big gains. If you are planning a significant cash gift before year-end, consider donating appreciated stock or mutual fund shares instead. As long as you have owned the asset for more than a year, you can deduct the fair market value – not just the lower amount you paid for the asset. And you get that beefed-up deduction even though you don’t have to pay tax on the appreciation. Another advantage: You don’t have to establish your tax basis for the stock or shares, which may be hard to do if you’ve lost the purchase records or if the company has been involved in spinoffs and mergers. You deduct the value on the date of the gift. Contact the charity as soon as possible to ask what you need to do to transfer ownership of the shares. (Never donate assets which have declined in value. Sell first, so you can deduct the capital loss, and then give the proceeds to the charity.) See Charities: Give Stocks Instead for more information.
Donate your IRA required minimum distribution. If you’re over 70½, you may make a tax-free transfer of up to $100,000 from your traditional IRA to a charity before December 31, 2013. The money counts as your required minimum distribution but isn’t added to your adjusted gross income. This has two potential advantages over withdrawing the money (which would then count as taxable income) and donating the cash so you can offset the income with an itemized deduction. First, you score a tax break even if you don’t itemize. Second, by keeping the money out of your AGI in the first place, it can’t trigger tax consequences such as making more of your Social Security benefits subject to taxes or imposing the new surtax on investment income. The money must be transferred directly from your IRA to the charity to stay out of your adjusted gross income. See Who Can Transfer IRA Funds to Charity for more information about the rules, and Don’t Forget to Take Your IRA Required Distribution for tips on the timing of the year-end transfer.
Contribute to a donor-advised fund. These funds, run by brokerage firms, banks, mutual fund companies and community foundations, are a great way to fulfill your charitable impulses. And they’re particularly attractive at this time of year, if you’re racing to meet the deadline for 2013 contributions but haven’t chosen the charities you wish to support. Contribute cash, stock and funds (tax-free transfers from IRAs are not permitted) by December 31 and you can decide later which charities will benefit. Until you give the order, your money is invested. When you’re ready, you can usually direct the money to any qualified, 501(c)3 charity. Many families use these funds to allow multiple generations to get involved without setting up an expensive family foundation. “The grandparents may set up the fund around the holidays and tell each family that they have x dollars to give,” says Sara Montgomery, philanthropic services specialist with Wells Fargo Private Bank. “Then they all come to the dinner table a few months later and explain which charity they gave to and why it was meaningful to them.” Investment minimums vary by administrator. The minimum at Fidelity and Schwab is $5,000; at Vanguard, $25,000; and at Wells Fargo, $50,000. See Donor-Advised Funds: Contribute Now, Donate Later for more information.
Set up a scholarship fund.Although a lot of people would like to set up a scholarship fund to honor a deceased friend or relative, or to help a student pay for college, it can be a very complicated endeavor. But many colleges and community foundations make the process easy. You’ll generally need to invest at least $20,000 to $25,000 to endow a scholarship that will pay out $1,000 every year, although individual institutions set their own rules. For example, San Diego State University currently requires $50,000 to endow a $2,000 annual scholarship, or you can commit to giving $5,000 a year over three years to finance three $5,000 annual scholarships. The University of California, Los Angeles, requires $100,000 to endow a $5,000 annual scholarship, but you can create a scholarship for one year with just $1,000. The college or community foundation will manage the money and look for applicants, and it may even match your contribution. See Help Students by Funding a Scholarship for more information.
Consider noncash donations.You don’t have to give money to get the tax break. You can also donate clothes and household goods. If you itemize, you may deduct the fair market value of the item (which is based on its current condition and is usually a lot lower than the purchase price); for help determining the value, go to TurboTax’s ItsDeductible or the Salvation Army’s guide. You may also deduct, say, the cost of ingredients for a dinner you make for a soup kitchen or stamps for a charity’s mailing, and up to 14 cents a mile if you drive your car for charitable activities in 2013. Hold on to records and receipts in case the IRS asks. See How to Properly Claim Deductions for Noncash Donations and IRS Publication 526 Charitable Contributions for more information about what qualifies and when you need a receipt from the charity or an appraisal.
And as you scramble to make contributions before year-end, think about how much easier it would be if you had planned your charitable giving earlier in the year. “Make it a line item in your budget, just like you would for a mortgage or car payment,” says Montgomery. “Saving $5, or $50, a week is a lot easier than coming up with a lump sum all at once.” You could stash the money in a savings account or another separate account so it is ready whenever you choose to give. Setting aside money throughout the year also makes it easier to give after a disaster -- such as to support the victims of an earthquake -- which could occur at any time. See 6 Things You Need to Know About Giving to Charity for more information about checking out a charity.


Post a Comment