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Giving holiday gifts with tax benefits

(MoneyWatch) With the holidays here, it's the time when we think about giving gifts to the folks and organizations that mean the most to us. I am often asked if there are any tax benefits in making gifts.

Here's a question a client recently asked:

"Are the tips I give building staff at Christmas deductible?"

While it's a good thought, unfortunately tips are gifts to individuals, not donations to a qualified non-profit organization. As such, these do not qualify as a deductible item.

So what are the guidelines? If you do plan to give gifts and donations this year, here are a few of the tax angles to consider.

Gifts and taxes

Gifts of cash and tips you give to individuals typically are not tax deductible.

However, there are possible exceptions. For example, the supplies or other property you give to your child's school may qualify as a charitable deduction. You can only deduct the cost of the property that is more than the value of the benefit that your child receives. In other words, if you give school supplies, you can only deduct the value of the supplies that do not benefit your child. Another possible tax-deduction for some holiday gifts is for donations to the neighborhood police or fire department.

If you are considering making a cash donation to a charity of more than a few hundred dollars, before you do, think about this: With the market, as measured by the S&P 500 index up about 14 percent so far this year, you may find that you have some nice gains in some stocks or mutual funds you bought over the past few years.

If you are planning to make a cash donation to a charitable organization, church, synagogue or other non-profit organization, then consider using appreciated shares of stocks or mutual funds instead of cash.

A donation of shares of a stock or a mutual fund can be deducted on your federal income tax return as an itemized deduction. There are two tax benefits that come with donating appreciated shares of stock or a fund. First you can deduct the amount of the fair market value of the shares that are gifted or donated. Second, you will avoid the unrealized gains on the appreciated shares. This works because of the general rule that the deduction value for property donated to charity is equal to the fair market value of the donated property. Where the donated property is "capital gain" property, the donor does not recognize the unrealized gain on the donated property. The only catch here is that you must have owned the appreciated shares for at least one year. Shares owned less than a year do not qualify for these special tax benefits.

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