As you are making your list and checking it twice, you might want to consider whether you want to make any year-end gifts to your favorite charities. If you do, you will be in good company. According to the National Philanthropic Trust, 95.4% of households gave to charity in 2013, for a total of over $241 billion in charitable gifts. High net worth donors gave to charity to support education (80%), basic needs (79%), arts (69%), health (65%) and religion (65%). The most common reason cited for charitable giving is to give back to the community. When your year-end list includes charities, we recommend that you research the charities, consider whether you want to give cash or other property, pay attention to the timing of gifts and make sure you receive and retain the receipts that prove you donated.
Make Your List and Check It Twice. The last quarter of the year is when charities usually receive the largest percentage of donations. It is also when donors receive solicitations in the mail, at the mall, on the phone and even at the door. As you consider where to "spend" your charitable dollars, you may want to spend some time checking out the charities asking you for money. Are they legitimate? Do they use their money wisely? How much do they spend on fundraising?
There are many ways to check up on charities. You can check Charity Navigator to see whether the charity is rated. You can also check your state's charitable database. For example, in Washington, you can investigate charities here. To see whether the organization is actually a charitable organization that qualifies for a charitable deduction, you can search for the organization on the IRS website. Depending on the size and type of charitable organization, you could even look at the charity's most recent tax filing by going here. Sometimes a general search in your favorite search engine will yield a plethora of information on your favorite charities, including their websites and comments by other donors, stakeholders and others.
Gifts of Cash, Securities or Other Property. According to the IRS, most individuals simply give cash to their favorite charities—no wrapping involved. Less than 130,000 households made gifts of stock or other property. Depending on your circumstances, a gift of securities or other property could be smart tax planning. Individuals may deduct up to 50% of their adjusted gross income (AGI) for cash gifts made to public charities and up to 30% of their AGI for gifts of securities or other property to public charities. Individuals may deduct up to 30% of their AGI for cash gifts made to private foundations and up to 20% of their AGI for gifts of securities or other property to private foundations. Other than qualified (marketable) securities, which are gifted at their fair market value, when you are making gifts of nonqualified securities and other property to private foundations, the amount of your deduction to such a foundation is limited to your basis in the nonqualified securities and other property.
Making a gift of appreciated property, such as securities, can be a very smart strategy. By giving appreciated stock to your favorite charity, you incur no capital gains tax with respect to that gift, yet you still can deduct the gift's full fair market value. If you have stock that has depreciated in value, generally the best practice from an income tax perspective is not to give the stock directly to charity but instead to sell the stock, take a loss on your tax return and then give the proceeds from the sale to charity.
No Time Like the Present. Contributions are deductible in the year they are made, so be sure to make your charitable gifts by December 31. Credit card charges made before the end of the year are deductible even if the credit card bill isn’t paid until the next year. Similarly, checks that are written and mailed by the end of the year will still be deductible in 2014 even if they aren’t cashed by the charity until 2015. While pledges are great, no charitable deduction will be available until the pledge is actually paid.
Don't forget to check to see whether your employer matches your charitable contributions. If your employer offers this benefit, you can make your gift go even farther by taking advantage of the match.
Thank You Notes Are Important. There are strict substantiation requirements that must be fulfilled for you to claim a charitable deduction for your gift to your favorite charity. No deduction is allowed for cash gifts of less than $250 unless you have either a bank record documenting the gift or a written communication from the charity indicating your name and the amount and date of donation. For contributions of $250 or more, you must obtain a contemporaneous written acknowledgement from the charity. If you donate property valued above $500, you must file Form 8283 with your return. If the contribution of property is in excess of $5,000, a qualified appraisal of the donated property must be obtained.
If You Still Feel Generous. Depending on your capacity to give and your appetite for complexity, you could consider establishing a donor-advised fund or forming your own private foundation. You could also do some planning to benefit both your family and your favorite charity by creating a charitable lead trust or a charitable remainder trust. Since these strategies may take some time to implement, you need to begin planning soon.
If you are over 70½, you are required to take money out of your IRA and retirement plan. For the past several years, some people have taken advantage of tax rules that allowed them to give up to $100,000 of that withdrawn money from their IRA directly to charity. In doing so, the individual contributing the property to charity is not subject to certain limitations imposed on taxpayers that would otherwise apply if he or she had withdrawn the money and then contributed the property to the charity. Unfortunately, Congress hasn't yet extended this favorable tax rule to IRA distributions in 2014. However, it is possible that it could still happen by year-end, so stay tuned!
Make your list, check it twice and enjoy using smart strategies to help your favorite charities while also maximizing your charitable deductions.
