Everyone's doing it. Microsoft's Bill Gates is leaving the firm this year to pursue his charitable efforts through the Bill and Melinda Gates Foundation. Warren Buffett has earmarked a considerable chunk of his wealth to charity. Domino's Pizza founder Tom Monaghan said goodbye to his company a few years ago to devote his time to charitable pursuits. Most people are charitable. Whether it's buying lottery tickets from your church's annual carnival or responding with a small check when solicitations arrive in your mailbox for causes you can get behind, it's human nature to help if you have the means. What trips up most donors is how to account for their generosity, literally. With so many different types of donations and an even broader spectrum of taxable implications, it's not a bad idea to explore the basics of charitable gifts.
Is It Deductible?
If you haven't filed your 2007 income tax return yet, there are a few things that you can do to lower your tax bill before April 15, like contributing to an Individual Retirement Account (or IRA). Unfortunately, the window for charity donation isn't as generous. Only charitable contributions that were completed during the 2007 calendar year may be deducted from your taxable income. Another important caveat is that you need to itemize your deductions. If you opt for this year's standardized deduction, it eliminates the itemized deductions that include things like mortgage interest payments, property taxes, and -- yes -- philanthropy.
You also have to make your donation to a qualified charitable organization. Most churches and charities qualify. Spending $3,000 to fund your nephew's band does not. That's important. Donating to a hurricane relief charity that has a valid tax identification number and is a registered, non-profit organization, is deductible, but helping out an affected family directly is not. If you have any doubt about the deductibility of the contribution, Publication 78 -- available from the IRS Web site -- provides a cumulative list of qualified charities and organizations. Also, even if you are donating to an established charity, the amount you can write off on your 1040 form may be limited. If your adjusted gross income is more than $156,400 -- or $78,200 if you are married and fi ling separately -- the amount that can be deducted may be less than what you actually donated. No matter how much you may have earned last year, any contributions that result in a material benefit to you are also restricted. For example, if you pay $200 for a charity dinner gala event, you can only write off the amount above the value of the meal. If you think a comparable meal and accompanying entertainment would cost $50, you may only deduct $150 as a charitable gift.
The same goes for emerging as the top bidder at a charitable art fair. Those church carnival raffle tickets? They're not deductible at all.
So Many Hands, So Little Time
Finding the right charity is important but typically a personal decision. If you're set on giving but unsure of where to give, look for local organizations like the California Community Foundation that match donations with area grant requests.
"As a philanthropic leader, we're trying to have a positive, lasting impact on the communities we serve, and it's especially important to give during this time of economic hardship," says Antonia Hernandez, president and CEO of California Community Foundation. Last year, the organization raised $235 million in donor contributions, the second-highest tally in the foundation's 92-year history. Whenever you donate, it is best to have a paper trail that you can share with the IRS. It is better to pay with a check than cash, for example. In fact, the IRS no longer recognizes a cash donation unless you either have a bank record of the transaction or a letter from the charity, which by law they must provide to you.
You may want to look for creative alternatives. For instance, for just a few thousand dollars, you may be able to set up a scholarship endowment fund at your alma mater. The college or university keeps the principle intact every year, dedicating the accumulated interest to scholarship disbursements.
There's a good reason to donate shares of publicly traded stocks or mutual funds that have appreciated considerably in value. As long as you owned the investment for more than a year, you won't have to pay capital gains on the accrued gains. No matter how long you have held the security, you can also deduct the fair market value of the donation. In short, you get a double tax benefi t through donating aged stock: by skirting capital gains while also writing off the full value of the investment on the day that it was gift ed.
Goods Are Good, Too
If you have ever donated a sack of old clothing to Goodwill or offered up old furniture to a veteran's charity, you're no stranger to the gifting of physical goods. Yes, these physical contributions are typically tax deductible, even big-ticket items like used cars or that vacation home that you can't seem to unload in this tricky real estate market. The key in all of these cases is determining the fair market value of the donation. Whether it's your prized baseball card collection or that leather briefcase that you don't use anymore, you need to assess a realistic value of what those items are worth.
Tax accounting software like Intuit's TurboTax will scour average selling prices from completed eBay auctions for certain items. You don't have to be so thorough, but make it an honest call because it will be a sticking point if your return should get flagged for an audit.
Charities play a critical role. They won't exist without us. Just make sure you gift responsibly and know the favorable tax consequences. Done correctly, charitable donations are the gift that gives back.
Rick Munarriz is a personal finance columnist for HispanicBusiness.com. He can be reached through www.Reportedly.com, where he discusses his latest articles.
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