This holiday season, giving can produce a nice payoff, both personally and financially.
It's a well-known tax fact that directing some of your gifts to those less fortunate can help you reduce your upcoming IRS bill.
But you also can literally share your wealth with family and friends without triggering any gift tax.
And some folks might find that they can give others appreciated assets that then can be cashed in without any tax consequences.
We'll look at those, and other strategies, in today's Part 4, Giving, of our series on Year-end Money Moves. If you want to review the earlier installments before you dive into the charity pool, you'll find them here:
Now, let's look at how giving to others can be a perfect financial and tax gift to yourself.
Know the ground rules
Uncle Sam encourages a charitable spirit, as long as you follow the tax agency's guidelines. First, you must itemize to deduct any donations. If you claim the standard deduction, which most taxpayers do, your generosity will help out your charity of choice, won't help reduce your tax liability.
Itemizing taxpayers also must be sure to give to an organization that has been vetted by the tax agency. Check IRS Publication 78 (you can do an online search here) to make sure the nonprofit meets IRS standards.
You also need to make sure you document your gifts. New tax law requires you have a canceled check, bank record or an official receipt from the charity to verify your gift. You don't have to send this info to the IRS with your return, but if the IRS asks and you can't produce the document, your gift could be disallowed.
And, in keeping with this post's theme, remember that timing is everything. To take advantage of a donation on your coming tax return, you need to make the gift by Dec. 31.
More on the general donation rules can be found here.
Household goods can be good tax breaks
Donating household goods and clothing that you no longer need also can help out your bottom tax line and others. This year, however, make sure the items are in good or better shape or the IRS could disallow your contribution.
The key here is to use the true fair market value of your gift. There are several software programs that can help you figure this out, as well as IRS Publication 561, Determining the Value of Donated Property. You also might check out eBay to see what the going price is for an item you're giving to your local Goodwill or Salvation Army branch.
The payoff of appreciated property
If in rebalancing your portfolio, you find an asset no longer fits your investment strategy, it could be a perfect charitable gift. As long as the asset has increased in value and you've owned it for more than a year, you can give it to a nonprofit and deduct its full fair market value. The charity then can use it and you avoid any capital gains tax on the asset's appreciation.
To get the maximum tax benefit here, make sure you've held the asset for the full 12 months plus one day; if you give away property held one year or less, you only are allowed to claim a deduction on the price you paid for it.
The value of vehicular donations
Ready to dump that jalopy you've been puttering around in? Think about giving it to a charity instead. The donation could be more valuable to you as a tax write-off than what you'd get for it or its parts.
But in giving your vehicle away, you must make sure you follow the tougher rules that the IRS put in place several years ago. Unfortunately, some folks overvalued their auto donations, so now the IRS has more complicated guidelines to assess the proper donation claim in these cases.
Your actual automotive gift tax break depends not only on the actual, fair market value of your vehicular donation, but also upon how the charity uses the car (or van or truck).
A special opportunity for older donors
If you are 70½ or older, you can have money from your IRA sent directly to your favorite charity. The option is applies to both traditional IRA and Roth accounts, but it's probably more beneficial to traditional IRA account holders, since much of the money in these accounts is eventually taxable.
When it goes straight to a charity, usually in the form or the account holder's required minimum distribution, the contributed cash is not counted as taxable income to the IRA owner.
The big drawback here is that these direct gifts from an IRA are not deductible. That, however, might not be that much of a disincentive, since many older taxpayers (like most taxpayers of all ages) do not itemize anyway.
Keeping it in the family
Some taxpayers also will want to look at giving financial gifts to family (and friends) this holiday season, or at other times of the year.
In 2007, you can give up to $12,000 (or $24,000 for married couples) to as many individuals as you like or can afford -- and if you've got a lot of $12K chunks to pass out, let's talk! These gifts have no tax ramifications for either the giver or the recipient.
And remember that this gift doesn't have to be cash. You can give up to $12,000 worth of appreciated securities to someone.
This might be something to think about if, for example, your parents are lower-income and will able to take advantage of the zero capital gains rate next year (discussed earlier in our year-end investment moves post). Give them appreciated stock worth $12,000 by Dec. 31. Then in January, they can sell the stock and not owe any capital gains taxes.