Year End Tips for Charitable Giving

The latest Tax Tip from the IRS provides some tips about charitable donations. The one item I want to highlight is the provision that is currently scheduled to expire at the end of this year. If you have significant savings in an IRA, and you have a favorite charity that you’d like to really help out, then you may want to hustle and make a donation straight from your IRA before year-end.

Thanks to this special provision, none of the distribution from the IRA will be treated as taxable to you. While you can usually deduct charitable contributions, there’s usually a number of limitations that prevent you from deducting too much relative to your income. But if you transfer funds directly from your IRA trustee (generally the bank or financial institution where you have your IRA set up), the full amount is not treated as income, regardless of your other income or deductions. Review the IRS rules and make sure your favorite charity qualifies to receive the donation…and then act fast so the transfer goes through before year-end.

Below is more information from the IRS:

IR-2011-118, Dec. 15, 2011

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. It can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2011 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
• And, as always it’s important to keep good records and receipts.

IRS.gov has additional information on charitable giving including:

• Tax Information for Charities & Other Non-Profits
• Publication 526, Charitable Contributions
• Online mini-course, Can I Deduct My Charitable Contributions?

Year End Tax Moves

With just a month left in 2011, it’s time to consider what year end tax moves you should make to minimize your tax bill. Here’s a few tips to consider:

Grab some itemized deductions…but only if it will benefit you.

While most people know things like medical expenses, charitable donations, and even work-related expenses can be deducted, fewer people understand the basics of when these deductions actually help. Everybody gets a “standard deduction” of $5,800 for Single filers, $10,600 for Married Filing Jointly, and $8,500 for Heads of Household (basically, single people who support a household for their dependent child).

If the total of your individual deductions doesn’t add up to more than the standard deduction, then don’t worry about saving those charity or medical receipts. In general, most people who aren’t homeowners just take the standard deduction because mortgage interest is what pushes most people close to, or over, the standard deduction amount.

Plus, medical expenses and work-related expenses have additional hurdles to clear. Medical expenses have to exceed 7.5% of your income (technically, your AGI, but “income” is plain-speak approximation) before they’re deductible…work-related expenses have to exceed 2% of your income.

The IRS provides a reasonably concise summary of the ins and outs of what’s deductible and when to itemize in Topic 500.

One last consideration…if you expect your situation to change considerably next year, that can affect when you want to pay certain expenses for tax purposes. For example, let’s say you’ve paid a bunch of medical expenses, still have a few bills to pay, but don’t expect to have a lot of medical expenses next year. In that case, you’d probably want to pay all those medical bills by the end of the year if you can. If you wait, you might not receive a benefit from the deduction next year since your total medical bills will (hopefully) be much lower. Another common example is property taxes. Many states and cities don’t require the second half of a property tax assessment to be paid until the following spring. But if you know you’re itemizing this year, and you might not itemize next year (paying off your house so no mortgage interest, lost a job so lower state taxes, etc.), then it may make sense to go ahead and pay your full property tax bill in the current year.

Note: see the final tip for info about TaxCaster, a tool that may help you with this tip.

Lower your energy bills AND tax bill…but act fast

As I wrote in this previous post, a number of energy credits are set to expire this year. Certain credits for less common items like solar and geothermal installations are scheduled to remain in place until 2016. But common and fairly simple improvements like insulation, energy efficient doors and windows, and a handful of other items qualify for a tax credit that expires at the end of this year. Don’t miss out if you’re planning to make some home upgrades.

Some deductions can wait until April, and still count for this year

If you have an Individual Retirement Account (IRA)–including Roth and SEP IRAs–or a SIMPLE plan, you can wait until the tax filing deadline to make your contributions. (Note: If you have not set up a SIMPLE plan by the end of the year, you can’t make contributions retro-actively.) The same is true for Health Savings Accounts (HSAs). So if you’re thinking about any of these deductions, you may want to wait until you’ve done the first draft of your tax return so you’ll know exactly how much you want to contribute based on the tax impact.

Push that kid out by the end of the year!

Expecting a child? Get that kid delivered by the end of the year and you get a deduction and credit for the whole year! OK, only kidding on that one. But just a note for people who had a child, or adopted a child, during the year, you get to take all the deductions and credits for the child just as if the child was in your home all year long.

Get a preview

There are a number of free tax estimator tools on-line. One I find is pretty intuitive and produces trustworthy results is TaxCaster, made by the same company that makes TurboTax. If your situation isn’t terribly complicated, you can enter your information from your most recent pay stubs and account statements to get a pretty good idea what sort of refund or balance due to expect. You can also play with the various deductions you’re considering to get an idea what impact they’ll have. This may be the easiest way to find out if certain itemized deductions will offer any tax benefit, especially deductions like medical expenses and work expenses that are linked to your overall income.

Finally, enjoy the holidays!

There’s more to life than money and taxes, after all. Even if you’re looking at a potentially nasty tax bill, don’t lose perspective on what really matters in life!