2012 is not that far away — we’re already well into the last quarter of the year. Now is a good time to think about lowering your 2011 income-tax liability.
There are many steps you can take to do this, but most must be taken before the end of the year.
If you itemize your deductions on your tax return, an excellent way to reduce your taxes is to make charitable contributions. The tax law is designed to encourage you to do so.
The best time to make cash contributions is at the end of the year. You get the same deduction as for contributions made earlier, but more time in which to earn interest on your money. Indeed, most charities receive a rush of contributions at year-end.
What contributions are deductible?
Subject to overall limits, you may take an itemized deduction for money, or the fair market value of property, you give to charity. However, only contributions to "qualified organizations" are deductible. These include:
- churches, temples, synagogues, mosques and other religious organizations;
- most nonprofit charitable organizations, such as the Red Cross and United Way;
- most nonprofit educational organizations, including the Boy Scouts of America and Girl Scouts of America, colleges, museums, day care centers (if the parents are working); and
- nonprofit hospitals and medical research organizations.
Not all people or organizations asking for donations are legitimate charities — what the Internal Revenue Service calls "qualified organizations." To become a qualified organization, most organizations, other than churches and governments, must apply to the IRS.
You can ask any organization whether it is a qualified organization, and most will be able to tell you. They should have an IRS letter saying so — you can ask for a copy. You can also call the IRS at 877-829-5500 to find out if a charity is qualified; or check IRS Publication 78, which lists most qualified organizations (there is a searchable online version: http://www.irs.gov/app/pub-78/).
Not all qualified organizations are listed in Publication 78, though. For example, churches, synagogues, temples and mosques are not required to apply for IRS recognition to be qualified charities, and are frequently not listed.
Easiest of all, however, may be to check the website http://www.guidestar.org, which lists 1.5 million qualified charities and contains in-depth financial information about them as well.
How much can you deduct?
There are overall limits on how much you can deduct each year as a charitable deduction. However, you don’t have to worry about them unless your charitable deductions are quite substantial.
Specific limits vary according to whether you give cash or property, but the overall limit is that your charitable contributions cannot exceed 50 percent of your adjusted gross income for the year.
Any contributions you make over this amount may be carried forward to the following year and deducted then. You can keep carrying forward any remaining amount for up to five years.
Donating stock and other capital gains assets
If you want to donate money to charity and you have investments — such as stocks, bonds or mutual funds — that have gone up in value since you bought it, a great tax strategy is to donate those assets directly to the charity.
When you do this, you may deduct the fair market value of the assets on the date of the donation and you don’t have to pay any capital gains taxes on the increase in value since you purchased it. The charity can then sell the assets and pay no tax at all on the proceeds.
This strategy works only for capital assets you’ve owned for one year or more. Also, you should never do this for stocks or other capital assets that have gone down in value because you won’t be able to deduct your loss. In this event, you should sell the asset, deduct the loss, and give the sales proceeds to charity.
Donating from your IRA
Ordinarily, it’s unwise to contribute money from an individual retirement account (IRA) because the withdrawal is subject to income taxes. However, if you’re at least 70 1/2 years old, you can transfer up to $100,000 from your IRA to a public charity tax-free.
This includes the portion covering your required minimum distribution. This rule is scheduled to expire after 2011, so act this year.
Be sure to follow the IRS rules for record-keeping for charitable contributions. Otherwise you could end up losing legitimate charitable deductions if you’re audited. You need to have a canceled check, account statement, receipt or other record for cash donations under $250, and an acknowledgment from the charity for donations over $250.
For most property donations you’ll need a receipt or written acknowledgment. For detailed information, refer to IRS Publication 526: Charitable Contributions.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.