Planning for your year-end charitable gifts

Add comment December 14th, 2007

  Tracy S. Beard, CFP® 

Are most charitable gifts tax motivated?  While we generally associate charitable gifts with tax deductions, the answer is no.  After all, when an investor makes a gift to a charity, they are generally giving away 100% of the asset.  This is the equivalent of a 100% “tax.”  Now for the good news…  In most cases, investors do get a tax deduction for making a gift to a qualified charity.  Taking advantage of the tax benefit requires a general understanding of charitable gift rules.  I had the opportunity last week to speak with Dan Loescher of Loescher & Associates regarding the charitable gift rules.   

SAVANT – What are the general rules for deducting gifts made to a qualified charity?   

Loescher - Individuals, who itemize their deductions, are able to obtain an income tax deduction and benefit by making a charitable contribution of cash or property.  Under new rules for 2007, each contribution must be evidenced by a receipt or other contemporaneous record in order to claim the deduction.  The amount of the deduction for gifts of property is the fair market value of the property at the time of the gift.  A letter evidencing a contribution is required to be provided to a donor who makes a contribution of $250 or more. 

SAVANT – Are certain assets better to gift to a charity?  

Loescher - We encourage our clients to consider gifts of appreciated securities in lieu of cash for larger gifts.  In this manner, the donor does not have to sell the security or pay the income tax on the gain to raise the money for the contribution.  The appreciation is not taxable on the direct transfer. 

In addition, you may have read that individuals who are older than 70 1/2 may transfer funds directly from an IRA account directly to charity.  The amount transferred is not includible in the donor’s income nor is an income tax deduction obtained. 

SAVANT – What are the most common mistakes made by individuals making charitable gifts?  

Loescher - For 2007, the new rules require a receipt for every gift.  This means that cash dropped in the Salvation Army kettles may not be claimed as a tax deduction nor may the cash pulled out of your pocket in church.  This will be a surprise for many. 

Certainly, one of the other big areas of confusion is the value of the household items given to Goodwill or the Salvation Army.  The value for the income tax deduction is not what the donor paid for the item but rather the garage sale price or the price that the charity obtains on sale.   

Finally, significant gifts made in cash forfeit the opportunity to utilize the capacity to transfer appreciated securities.  

* Dan is a Certified Public Accountant specializing in working with charitable organizations and estate & taxation matters.