As we approach year-end and thoughts start moving to making gifts to charity, you may want to know about some of the tax-efficient ways to make your donations.
But first, three overall rules:
You’ll only be able to write off charitable contributions if you’ll itemize your 2014 federal tax return. You can’t claim them if you’ll take the standard deduction, although some states do offer limited charitable deductions even if you don't itemize on your federal return. Also, depending on the asset you donate and the type of charity, the amount of the donation that’s deducible varies.
You generally can’t deduct more than 50 percent of your adjusted gross income (AGI) for cash contributions or above 30 percent for donations of appreciated property to public charities. Gifts of appreciated stock given to private foundations can be deducted up to 20 percent of AGI. Any donations above the limits can be carried forward up to five years.
For any cash or non-cash donation over $250, you’ll need to have the charity’s acknowledgement of the gift before you file your tax return. So if you write a $1,000 check to the United Way, unless you have the United Way’s acknowledgement noting that you didn’t receive any goods or services in exchange for the donation, the IRS can disallow your deduction.
Here's advice on getting the most out of five types of charitable donations:
1. Donating appreciated securities For many people, the most tax-effective way to contribute to charity is donating significantly appreciated publicly-traded stock that you’ve held for more than a year. That’s because you can deduct the fair market value of the stock and won’t owe taxes on any appreciation.
Here’s an example: Say you bought a stock many years ago for $3,000 and it’s now worth $10,000. If you give it to charity, you can write off $10,000, as long as your adjusted gross income exceeds $33,333. And that $7,000 gain won’t be taxed.
2. Donating clothes and household goods When making these types of contributions to a thrift store, the IRS generally lets you claim a deduction for the amount you’d get by selling them. There are many websites, such as this one from Goodwill, that provide approximations for the value of donated clothes and furniture, so you can see what they might be worth.
Keep in mind that if you’ll be donating non-cash items of a similar nature worth $5,000 or more, you’ll need to get an appraisal of their value. (There's no such requirement if your non-cash donation is publicly-traded stock.)
3. Costs incurred in connection with not-for-profit board activity If you’re on the board of a not-for-profit, you can deduct out-of-pocket expenses you incur in connection to the work. For instance, if you drive to a board meeting or a retreat for the organization, you can write off mileage at 14 cents a mile.
4. Donating art Considering donating to a charity art that has appreciated in value? Bear in mind that if the group will auction it off or sell the piece, your deduction will be limited to your cost. However, if you give the appreciated art to an organization that will use the art for its tax-exempt purpose, you can claim a donation for its fair market value, as long as you’ve owned the piece for more than one year and have proper documentation for the value of the gift.
5. Direct contributions from IRA accounts Based on the legislation Congress recently passed and is expected to be signed into law by President Obama, if you’re over 70 ½, you might want to make a charitable gift directly from your IRA. The Internal Revenue Service (IRS) lets people 70 ½ and older make charitable contributions of up to $100,000 directly from their IRA and have them count toward their required minimum distributions (RMD). This tax break was due to expire but the legislation renewed it for 2014.
You won’t get a deduction for this contribution, but the gift will reduce the amount of taxable distribution from your IRA. For example, if you have a required minimum distribution of $75,000 and direct $25,000 to the United Way, you’d report a taxable IRA distribution of $50,000 on your Form 1040. This strategy will also reduce your adjusted gross income, which can help lower your other taxes.
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