The holiday season goes hand in hand with the season of giving. Not only do the festivities provide reasons to think of others’ needs, but the end of the year also leads to questions about tax deductions.
As you consider how to make donations to support your preferred philanthropic institutions, it’s necessary to consider how to provide the greatest benefit to the organization in question, as well as how to determine the value of what you’re contributing. Beyond itemizing your donations for tax purposes, there are a few other factors to consider in planning gifts to organizations.
Even the timing of a donation can play a role, especially if you expect your tax situation to change between the end of this year and the end of next year. To reduce your 2013 tax liability, gifts must be made before the end of the year.
While there are many deserving organizations that need financial support, prioritize working with those that have established a non-profit status. Otherwise, your donations will not be tax deductible. The IRS maintains a list of charities on its website.
Of course, the details of your tax situation may vary; you’ll need to consult with a tax professional who is familiar with your finances to find the best strategy for your charitable giving. Furthermore, the savings available to you will depend on your tax bracket.
Charles Donalies, a certified financial planner, points out that cash gifts are the easiest donations to place a value upon. “Cash donations are the easiest to calculate. You subtract the total donation from your tax liability,” says Donalies. “For example, if you’re single and earn between $36,350 and $87,850 (or $72,500 and $146,400 for married couples), you are most likely in the 25 percent tax bracket. A $1,000 donation to a charity could save you $250.” Furthermore, cash gifts are the easiest type of donation for many non-profits to make use of.
That being said, donations of stock can represent a greater tax deduction, because the donation will also allow you to avoid future taxes you would otherwise have been liable for.
“For appreciated stock that’s been held longer than twelve months, you can reduce tax liability, but also save by avoiding capital gains and medicare tax on the appreciated value,” Donalies explains. “If you’re in the 25 percent tax bracket and donate stock that originally cost you $100 and now is valued at $1,000, you can save $250 [just like with a cash gift], and also avoid paying a $135 Capital Gain Tax and $34.20 Medicare Tax on Investment for a total of $419.20 savings.”
Donating household goods, however, is a more complex process. Donalies lays out the process: “For household items, like clothing and furniture, you need to first determine the value of the item using IRS Publication 561 or the Donation Value Guide provided by the Salvation Army. A shirt may have cost $30, but its current value might be $4. Add up the value of all items donated and subtract that total from your tax liability.”
You may be able to claim the full value if the donations you are making are for brand new products, such as toys purchased for holiday gift drives, but it’s important to investigate if the charity you wish to support may be able to stretch a cash gift to purchase more items in bulk than you might be able to buy on your own.
Taking the time to consult with a tax professional will allow you to determine how both you and the charitable organizations you support can most benefit from your donations.