Tis the Season of Giving


No doubt about it, December has everyone in the giving mood. People are busy buying and exchanging gifts, acknowledging friendships and the love of family members. Giving can also be smart tax planning while providing much needed support for those less fortunate in our community. Here’s a summary of the most popular ways people give and get a tax deduction:
  • Cash. Cash remains the most often way people give to tax-exempt organizations (charities and religious organizations). In order for you to receive a tax deduction for 2013, the postmark for checks mailed must be dated no later than December 31st. For gifts using your credit card, the transaction must be dated prior to December 31st. Deductions are limited to 50% of your Adjusted Gross Income (AGI). Any excess contributions above this limit can be carried forward for up to five years.
Tip: By using your credit card you can also rack up rewards points! For gifts of more than $250, be sure to have the charity send you a written confirmation of the gift and keep records of this along with evidence of your gift (cancelled check or credit card statement).
  • Clothing. This is an easy way to create a tax deduction and help a lot of people who could use additional clothing during the remaining winter season. My rule of thumb is … ‘if you haven’t worn it in the past 24 months, give it away’. To secure your tax deduction, be sure to create a detailed list of items and their value and get a receipt from the charity indicating the gift was made before the end of the year.
Tip: The IRS is cracking down on the value placed on used clothing. For guidelines visit ‘Donation Value Guideline’ at www.satruck.org.
  • Publicly-traded securities. A gift of appreciated securities such as stocks and bonds that you have held for more than one year allows you to save taxes two ways. First, you get a deduction for the full current market value of the gift. Second, you also ‘give away’ the embedded capital gains taxes on the appreciation of the asset. With stock, if you want to continue to own the stock, simply use cash to replace your shares. You’ll now have a tax deduction and the same number of shares but with a new, high cost basis. Gifts of appreciated publicly-traded securities held for more than a year are limited to 30% of adjusted gross income. Deductions in excess of that amount can be used in future tax years for up to 5 years.
Tip: Be sure to allow enough time for these transfers to be completed before year-end. Also, if you need the deduction but haven’t decided on a charity, consider setting up a Donor Advised Fund through your local Community Foundation. For more information visit www.AlabamaGiving.org.
If you’ve held the security for less than twelve months, your deduction will be based on the lesser of current market value or your cost basis (generally- what you paid for the security). These gifts are treated similar to cash gifts and are generally deductible up to fifty-percent of AGI.
If you give a security that has depreciated in value, you do not get a deduction for the losses so this is generally not the ideal gift. Your better choice is to sell the security, recognize the loss (which can be used to off-set realized gains either now or in the future), and simply write a check to the charity.
  • Retirement accounts. The Pension Protection Act allows anyone who is age 70½ or older to gift up to $100,000 of their Traditional IRA directly to a public charity or charities without having to report any income. While the donor does not receive a tax deduction, he or she avoids receipt of income from the transfer. The transfer does qualify for the Required Minimum Distribution for 2013.
Tip: Unless they extend this provision of the law, this will be the last year you can use this strategy.
  • Life income gifts. I see a lot of interest in charitable gift annuities, whereby you make a gift to a charity or religious organization in exchange for a monthly life income. At your death, the unused portion of the gift reverts to the charity. As the donor, you can be the income beneficiary or you may designate someone else. The amount of the deduction is based on the present value of the gift.
Tip: Your income stream is guaranteed by the charity so you’ll want to choose a charity in solid financial condition.
  • Tangible personal property. People often give old cars, boats, jewelry or other personal items to charity.   Generally, you receive a charitable tax deduction for the lesser of the fair market value or your basis in the property (what you paid for it).
Example: You paid $10,000 for a ring that is now worth $15,000. A gift to charity results in a $10,000 tax deduction. If the ring had dropped in value to $5,000, you would receive a deduction for $5,000.
Life insurance. While I don’t run into this often, a gift of a life insurance policy can make great sense. Let’s say that you have a $100,000 life policy with $30,000 of cash value and you no longer personally need the life insurance. If you give it to charity, you’ll get a deduction for its fair market value, generally its cash value ($30,000 in this case). 
Tip: If the charity chooses to hold the life insurance until your death, it receives the full death benefit….a nice bit of leverage for the charity.
  • Annuities. Gifts of annuity contracts result in adverse tax consequences and should generally be avoided.
  • Real estate. The rules surrounding gifts of real estate to charities are complex and should be made only after consulting with a tax specialist.
Note: You must itemize your deductions (versus the standard deduction) to receive the tax benefits of charitable giving.