Max Out Tax Savings When You Give

Talk about a win/win situation: Getting the most out of your charitable contributions can help you afford to be even more generous.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

February 21, 2007

Doing good can also be good for your bottom line. If you itemize deductions, you can write off your charitable contributions, whether you give money to a church, stocks to your alma mater or clothing to overseas relief efforts.

But as is usually the case, the IRS has plenty of rules that can trip you up if you're not careful. Here's how you can make sure to max out on tax savings when you donate to a nonprofit:

RELATED LINKS
	Charitable Contributions Taxopedia
	The Kiplinger Tax Center

The right organization

For your donation to be deductible, it must go to a nonprofit group that is approved by the IRS. Most often, these are charitable, religious or educational organizations, but they also can be everything from your local volunteer fire company to a group for the prevention of cruelty to animals. You can even deduct a donation to the federal government to reduce the public debt.

But there are also lots of nonprofit groups that don't qualify: civic leagues, chambers of commerce and homeowners associations, just to name a few. Confused? If you're not sure whether the group you want to help is approved by the IRS to receive tax-deductible donations, check IRS Publication 78 for a complete list. The IRS even has an online search tool that allows you to enter the name and location of an organization and find out instantly whether it passes muster.

Make sure it counts

It used to be that keeping a private log of your cash donations was enough for any gift less than $250. But Congress recently tightened the rules for substantiating donations of money. As of January 1, 2007, cash contributions, no matter how small, can't be written off unless you have a canceled check, bank record, or a receipt with the charity's name and donation amount. So from now on, cash in the church collection plate or the Salvation Army bucket is a no-no if you want to be able to take a deduction for it.

As with all itemized deductions, timing is everything. You can take the deduction for your contribution in the year that you make it. So, for example, if you mailed a check to your favorite charity on December 31, 2006, you can write it off on your 2006 return. If you charge the donation on a bank credit card, the write-off is claimed in the year the charge is made, even if you don't pay the credit card bill until the following year. But a pledge to make a donation is different: Because it's only a promise of a future donation, there's no deduction until you pony up.

Also the sky is definitely not the limit on how much you can deduct. The basic rule is that your contributions to public charities, colleges and religious groups can't exceed 50% of your adjusted gross income. The caps are a bit lower for other types of nonprofits. And the limit for appreciated property is 30% of AGI. If these restrictions limit your write-off in the year of the gift, the excess deduction carries over to the next year.

Also, keep in mind that you can't write off a contribution to the extent that you get something in return. For example, if you buy a $50 ticket to a fundraising dinner at a church, but the cost of the dinner is $20, you can deduct $30. For donations of more than $75, the nonprofit must give you a written statement telling you the value of what you received in return and reminding you that you can't deduct that portion of your contribution. There's also a special rule for folks who donate to colleges and universities and receive the right to buy tickets to school athletic events: They can deduct 80% of their donation.

Now that you have the basics, here are some special rules for particular types of donations:

Appreciated property

Cash may be king, but if you want a really big tax saver, your best bet may be a donation of appreciated property -- securities, real estate, art, jewelry or antiques. If you have owned the property more than a year, you can deduct its full fair market value and escape income tax on any appreciation. It pays to keep that property the full 12 months before giving it away: For property held one year or less, IRS only allows you to claim a deduction on the price you paid for it.

Let's say you own stock that you bought many years ago for $1,000 that is now worth $10,000, and you intend to make a $10,000 gift to major fundraiser for your alma mater. If you write a check for $10,000, the college gets $10,000 and you get to deduct $10,000. If, instead, you give the $10,000 worth of stock, the college still gets $10,000 (it won't owe any tax on the profit when it sells the stock), you still get to deduct $10,000 ... and you get something more. You get away from the tax you'd owe if you sold the stock for $10,000. Such a sale would trigger a capital-gains tax on the $9,000 of profit, and that would cost you $1,350.

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