Feel good now, pay less later
Remember to stay in IRS' boundaries
Cox News Service
November 27, 2005
The most rewarding way to cut your tax bill is to give to charity.
You get to feel good now, because you have done something to improve the world around you. You get to feel good again next spring, when you fill out your tax forms and turn your kindness into itemized tax deductions.
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In 2003, 38.6 million Americans did just that, claiming an average deduction of $3,614. If you are in the 25 percent tax bracket, think about that as a tax savings of $903.50.
Those numbers can only increase in the wake of Hurricane Katrina.
A high percentage of giving will take place in the next few weeks, because of the tax deadlines, the warm-fuzzy factor and because tens of thousands of charities are about to mail out their holiday fund-raising pleas.
It's important to pay attention to the rules, however, if you want to benefit from tax breaks. Here are some things to think about:
• Qualified charities. Hundreds of thousands of organizations have been recognized by the IRS as tax-exempt charities.
Some are obvious, like the American Cancer Society and the Salvation Army. But there are many others in niches — and some that specialize in keeping the money for themselves.
To check whether a charity is recognized, go to www.irs.gov, click on Search for Charities and find Publication 78. Note that churches, synagogues, temples, mosques and governments may not be on the list, because they are not required to receive this listing.
If you want to check how a given charity uses your money, go to www.guidestar.org and look for the most recent Form 990 filed by the charity. Another useful charity watcher is www.give.org.
• Don't play games. You can't claim deductions for political contributions, fraternity or country club dues, lottery tickets or donations at a blood bank.
• Hurricane Katrina. The federal government set up a number of disaster-related tax breaks, both for victims and for people making charitable donations. You can get the full story at www.irs.gov, along with giving tips and a warning about Katrina-linked scams.
High-income taxpayers got a super-sized break in the Katrina Emergency Tax Relief Act.
In the past, charitable deductions have been limited to 50 percent of adjusted gross income, as a rule. The Katrina law allows individuals to deduct as much as 100 percent of AGI, provided the gifts are in cash, are made before the end of the year and are made to charities that meet certain conditions. The gift does not have to be related to Katrina relief.
Who could possibly contribute all of his income? "This would be someone with significant assets," said Bob Scharin, editor of a newsletter for tax professionals. "It might be a once-in-a-lifetime thing where someone wanted to contribute a lot and perhaps build a wing onto a hospital or school."
The donor might be someone who got a big inheritance and just wants to pass it along. Or it might be someone who can live off tax-free income, from municipal bonds for example, Scharin said.
• Record-keeping. In general, you need to keep some record of all contributions, both cash and goods. The requirement is minimal — a canceled check or a description of contributed goods, for example — for contributions of less than $250. Above that, more detailed records must be kept, and you may need a written acknowledgment from the charity. For details, check IRS Publication 526.
• Donating property. As a general rule, you can deduct the fair market value of clothes or other items you give to charity. You can check what people are actually paying at thrift shops, for example, or you can buy commercial software from the major providers of tax software.
• Stocks. If you want to donate shares that are worth more than you paid, consider giving the shares themselves. You could sell the stock and give cash, but then you would owe taxes on your profit. Major charities have procedures to handle gifts of stock.
On the other hand, if you want to give away a loser, you'll be better off selling the stock and donating the cash. You can claim the loss on your tax returns.
• Cars and boats. Too many people have given away clunkers and claimed they were worth a lot. Congress figured it out, and now there's a rule to block that form of cheating.
With narrow exceptions, your deduction now is limited to the amount the charity gets when it sells the car. If a charity keeps your car for its own use or substantially modifies it, you can still claim fair market value.
"You might want to consider whether you're better off selling the car and donating the cash, if you think you can get a better price," advised Scharin.
• Online donations. Charities large and small now offer online donation arrangements. Check the charity's Web site for instructions.
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