There’s more than one way to collect deductions. “It’s better to give than to receive,” the old saying goes. Fortunately, charitable giving can also help save on taxes. Here are six ways to maximize your deductions:
1. Load up on donations at the year-end. The holidays are a traditional time to give gifts to charity and with good reason. Not only do you help a deserving cause, you get immediate tax gratification: The gifts you give during the holiday season reduce the tax bill you must pay by April 15th (or the next business day if April15th falls on a weekend or holiday). Note that charitable donations are deductible only if your itemized deductions exceed the standard deduction. In that case, year-end donations might put you over the top.
2. When in doubt, charge it. Usually, you will make contributions to charities by check or in cash, but you can also charge donations via a valid credit card. Any amount that is posted in your credit card bill in December is deductible on your current year return — even if you don’t actually pay off the charge until later.
3. Give away appreciated securities instead of cash. You don’t always have to give cold hard cash to a charity. For instance, you can donate securities such as stocks, bonds or shares of a mutual fund. If you have held the securities for more than one year, you can deduct the full fair market of the shares. To maximize the tax breaks, donate appreciated stock with a low tax basis. Besides the large deduction, there is no tax due on the stock’s appreciation in value.
4. Watch for a tax trap for gifts of art. A special tax rule comes into play when you donate collectibles to a charity. If the charity does not use the gift to further its tax-exempt function, your deduction is limited to the property’s basis instead of its fair market value. For example, if you donate a valuable painting to your Alma mater, you should specify in writing that the painting must be hung in a place where students can easily view it and study it. Make a condition of the gift that the school cannot sell the piece for cash, because that would reduce your tax deduction to the amount of your basis in the painting.
5. Write off expenses while doing volunteer work. Although you can’t deduct the value of your time donated to charity, you can deduct expenses incurred while performing good deeds. For example, if you travel by car on behalf of a charity, you may deduct your charity-related auto expenses or take a standard deduction of 14 cents per mile, plus tolls and parking fees. Other deductible expenses are long-distance telephone charges, mailing and fax costs.
6. Cash in on tax benefits for a fundraiser. If you buy a ticket to a fundraiser, deduct the cost of the ticket minus the value of the benefit received. Let’s say you and your spouse attend a $100-a-head dinner and the charity states that the dinner for two costs $75. As a result, you’re entitled to a deduction of $125. If you can’t attend the dinner and you return your tickets prior to the event, the full $200 is deductible.
Remember: Recordkeeping is more critical than ever. For starters, you must obtain written substantiation from the charity for gifts of $250 or more. This rule has been in effect for some time. But here’s a twist on the rules:
Under current law, you cannot write off contributions of cash, checks or other monetary gifts unless the donor retains either a bank record that supports the donation or a written communication from the charity that meets specified requirements.
Also under current law, no deductions are allowed for contributions of clothing and household items that are not in “good used condition or better.”
Congress also gave the IRS authority to issue rules stating that deductions would be denied for items of “minimal monetary value, such as used socks…”
For purposes of this new rule, “household items” includes furniture, electronics, appliances and linens. A favorable exception allows write-offs for single items that are not in “good” condition or better if they are appraised at more than $500. If you’re claiming a deduction for property valued at more than $5,000, attach an independent appraisal to your tax return.
McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.