It's the end of the year and the holiday season brings out the generosity in many folks. This is a time when people think more about goodwill and giving. It's also a time of year to make some financial gifts that can result in the gift of lowering your taxes.
Here is a rundown of some ideas for making financial gifts to charity and family for those in a giving mood to consider:
Donations To Charity
The end-of-year dash for tax deductions prompts a wave of charitable donations. Last year charitable gifts totaled over $67 billion and, according to a recent survey, most charitable donations are made in cash. But in the haste to make donations and get tax deductions, many people overlook some important details and alternatives, so here are a few things to keep in mind when making donations:
Donate Cash with Care: Say you go to church and are inspired to drop a wad of cash into the collection basket. To qualify for a charitable donation deduction on your taxes, you now must have bank or credit card records or a written statement from the charity showing the date and amount of the contribution and the name of the charity. Up until last year, such proof was only required for gifts of $250 or more. The bottom line: without a receipt to prove your donation, your reward will be in heaven but not on your tax return.
Donate Shares with Gains: As a general rule, folks who donate shares of stock or a mutual fund that they have owned for more than a year can claim a charitable gift deduction of the market value of stock or mutual fund shares donated to charity. Now here's the best part: neither you nor the charity will pay taxes on the gain when the charity sells the shares. Essentially you are giving away the tax liability on the investment gains and getting a tax deduction for the gift! But don't make the mistake of giving away stock that you have owned for less than a year or is worth less than you paid for it. You can only deduct current market value of the shares and cannot take a deduction for the loss.
Give to Donor-Advised Funds: Many folks like to make donations to a number of charities which makes it a hassle to give anything other than writing a check. A great alternative is to make one large lump sum gift to a donor-advised fund, which would then dole out the money to the various charities you choose. Using a donor-advised fund, you can make a transfer of appreciated shares of stock or mutual funds, which can be sold and distributed by the donor advised fund to the various charities you select. You get the tax deduction for the contribution now and the money is distributed to the charities of your choice later. The most popular donor advised funds are offered by Fidelity Investments, The Vanguard Group and Charles Schwab & Co.
Donate Taxable IRA Distributions: Folks who must take minimum required distributions from their IRAs can donate these distributions to charity and exclude the distribution from their income. This is referred to as the "IRA Charitable Rollover" and unless the Congress votes to extend this tax break, it will not be allowed next year. This break is available only to IRA owners who have reached age 70½ and are required to make IRA distributions. The "IRA Charitable Rollover" must be made from a traditional or Roth IRA and not from any other type of retirement plan. The best part is that the distribution will count towards the amount required to be distributed!
For IRA owners who are required to take distributions and are going to make a cash donation to a charity anyway, this tax break provides the best way to do both. Before this new tax break, the required distribution was taxable as income and for many taxpayers, the charitable contributions they make may not be tax-deductible. Now with this new tax break, the portion of the distribution paid directly to the charity, while not tax-deductible, is entirely excluded from taxable income. Making an "IRA Charitable Rollover" can also help to reduce the amount of Social Security income that is taxable.