'Tis the Season for Giving

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'Tis the Season for Giving
by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
Updated November 12, 2008

Year-end is a time when we think about giving, and that includes giving back to the community by donating to our favorite charities. While it may be better to give than to receive, with proper planning it's possible to do both at the same time as you share your good fortune with others.

Consider the strategies below to help you make the greatest impact with your charitable giving while receiving the maximum tax savings for yourself, too.

Ground rules for giving
The tax aspects of charitable giving can be complex, so it's a good idea to consult a tax professional. That said, here are a few ground rules:

Itemize deductions on your tax return if you plan to deduct charitable contributions.
Request a receipt if you make a donation of $250 or more to a single charity. Also, you'll need a receipt or a corroborating bank record for all cash donations, regardless of the size of the gift.
Get an independent appraisal for gifts of property in excess of $5,000 ($10,000 for closely held stock). Exception: You won't need an appraisal for exchange-traded stocks, bonds or mutual funds.
Subtract the value of any benefits you received for your charitable contribution (e.g., books, tapes, meals, entertainment and so on) before you deduct it.

Keep in mind, you can deduct up to 50% of your adjusted gross income (the "bottom line" on page 1 of IRS Form 1040) for most donations to qualifying public charities each year (30% for gifts of long-term property—see section titled "Long-term capital gain property"). If that's not enough to cover your charitable gifts in any given year, unused deductions may be carried forward for five years.

Tax treatments by type of gift
Generally speaking, the tax advantages of a charitable contribution depend on three factors: the recipient (only donations to qualified charities are deductible); how you structure the gift; and its form. Different types of charitable donations—cash, stock or personal property—offer different tax advantages and drawbacks. Let's look at some of the options.

Good old cash
Cash donations are simple and usually fully deductible. As previously mentioned, you will need a receipt from the charity or a bank record (such as a canceled check or statement) to substantiate your cash gift, no matter how small.

For those age 70½ or older: For 2008 and 2009, you can still make charitable contributions of up to $100,000 directly from your IRA tax-free. Even though you don't get to take the amount of the contribution as an itemized deduction, you're still likely better off because the IRA distribution is not included in your adjusted gross income. What's more, the tax-free transfer to charity counts toward your required minimum distribution.

Tangible personal property
You can donate almost any item, including old clothing, household goods, vehicles and so on.

If the property doesn't relate to the charity's mission, you may deduct your cost basis (in other words, how much you paid for it) or the property's current reasonable value, whichever is less.

If property is related to the mission of the charity—old clothes donated to the Salvation Army, for example—it's usually fully deductible based on its current reasonable value. Many charities will provide some guidance on "thrift value," but it's ultimately up to you to determine the value of your donation for tax purposes.

Keep in mind that gifts of used clothing and household items must be in "good used condition or better." Most charities won't accept a gift unless it's in satisfactory condition to begin with, but you can always take digital pictures of donated household items and used clothing if you're worried about proving their condition in the event of a tax audit.

Ordinary income property
You can donate property created by or used in a trade or business. This includes inventory held for sale—or, if you're an artist or craftsperson, items you created for sale. This category also covers property that, if sold, would generate ordinary income instead of long-term capital gains, such as investments held for one year or less.

Long-term capital gain property
You can usually deduct the full fair market value of appreciated long-term assets such as stocks, bonds or mutual funds you've held for more than one year. For example, the full fair market value of publicly traded securities is the average of the high-low price on the date of transfer. What's more, there's no capital gains tax.

A wrinkle here is that the deduction is limited to 30% of your adjusted gross income instead of the usual 50% limit for donations of cash and short-term property made to public charities—though you can still carry forward unused deductions for five years.

If you choose to deduct your cost basis only, you can raise the limit to 50% of your adjusted gross income. But if you're holding securities with a loss, it's better to sell first, take the capital loss for tax purposes, and then donate the cash. Keep in mind, in most cases, donating appreciated securities can be a cost-effective way to benefit the charities of your choice (see box).

Consider Donating Appreciated Securities

Let's say you'd like to donate $10,000. If you have appreciated stock (or bonds or mutual funds) that you've held for many years, consider donating that instead of cash.

Why? If you sell your appreciated stock first and then give the cash, you'll pay the 15% capital gains tax. But if you donate the stock to a charity, there's no capital gains tax. The charity gets the full $10,000, and you get a $10,000 tax deduction.

On the other hand, if you're holding securities at a loss, sell them first and then donate the cash. That way, you can claim the loss on your tax return.

Volunteering
You can deduct transportation costs and other expenses related to volunteering. However, keep in mind, the value of volunteer time isn't deductible.

So this year, when you're feeling generous, consider these tax-savvy giving strategies. Remember, being smart about giving can not only help your designated charity but also lower your income tax.

Taking Your Giving to the Next Level

You don't have to be a Ford or a Carnegie to set up an ongoing charitable legacy for you and your family. Consider the four strategies below, two of which could also provide you with a charitable deduction and a steady stream of income in return.

Better to give and receive

Charitable Remainder Trusts (CRTs). With a CRT, you can donate appreciated property to a trust you establish. In return, you receive a current tax deduction, and income for a set period or for life. When you die, the charity gets the "remainder." CRTs involve up-front and ongoing legal and accounting fees, and the investments must be managed.
Pooled Income Funds. These work much like CRTs except that the charity takes on the administrative and ongoing management duties.

The gift that keeps on giving

Private Foundations. These are tax-exempt entities established by wealthy individuals or families for the purpose of making ongoing charitable gifts. They can involve substantial setup and ongoing compliance costs, rules against self-dealing and so on.
Donor-Advised Funds. Like Schwab Charitable Fund™, these are pools of money managed on behalf of many donors. However, you may recommend how the fund invests your money and which charities receive distributions from your part of the fund. You receive a tax deduction in the year you contribute to the fund, and the organization handles the setup and ongoing compliance. Plus, you can name your part of the fund (for example, the "Smith Family Charitable Fund").

For more information, see "Smart Strategies for Charitable Giving."

Important Disclosures

This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue any investment strategy.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

Schwab Charitable Fund™ is the operating name of the Schwab Fund for Charitable Giving®, an independent nonprofit organization. The Schwab Fund for Charitable Giving has entered into service agreements with certain affiliates of The Charles Schwab Corporation (Charles Schwab & Co., Inc. and Charles Schwab Investment Management, Inc.).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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