Looking to make a last-minute charitable contribution? These strategies offer added tax benefits.
(MONEY Magazine) -- Like many Americans, you're probably gearing up this month to write a check to your favorite charity, both to show your goodwill toward men and to nab some last-minute tax savings. (December tends, after all, to be the most generous month, with about $28 billion in donations recorded last year, according to the Atlas of Giving.)
While a check certainly achieves both purposes, "there may be methods of giving that are more to your advantage," says Walt Mozdzer, a financial planner in West Des Moines, Iowa.
The strategies that follow provide even greater tax savings so you can feel doubly good about doing good.
Added benefits: no capital gains taxes and a potentially bigger write-off.
Got an appreciated investment that you want to get rid of because its prospects stink or you need to rebalance?
You could donate a stock, bond, or mutual fund shares directly to charity. You won't owe capital gains taxes; plus, assuming you've owned the security for more than a year, you can deduct the full market value -- not just the amount you originally invested.
When to act: depends on the charity. If the organization has a brokerage account, the process should take only a few days. If not, transfer the security to a donor-advised fund, a charitable-giving vehicle that allows you to take a write-off on 2011 taxes, but make the grant once the organization is set up to accept it.
While these often have high minimums, you can open one at Fidelity or Schwab with as little as $5,000.
Added benefit: no income taxes on a required distribution.
If you're 70½ or older, haven't taken the required minimum distribution on your traditional IRA this year, and don't need the cash for living expenses, you can donate all or part of it (up to $100,000) to avoid adding the amount to your taxable income.
An IRA-to-charity rollover can also reduce the taxes owed on Social Security benefits and make it easier to claim deductions requiring spending in excess of a certain income threshold, such as the one for medical expenses.
So even though you give up the charitable deduction, your tax bill will probably be lower than if you took the distribution, then donated.
Just be aware that this provision is set to expire at the end of 2011, "and there's low probability of extension," says Reston, Va., financial planner Mark Joseph.
When to act: by December 15, since there's paperwork involved.
Added benefit: a credit on your state taxes.
A handful of states offer tax credits for donations to community foundation endowment funds, which make grants to local projects and programs. (You still get the federal deduction if you itemize too.)
Endow Iowa, for instance, gives a credit of 25% of the donation. Endow Kentucky allows donors to claim 20% of gifts, up to $10,000.
A credit is especially valuable since it directly reduces tax you owe, vs. a deduction, which reduces your taxable income.
Find programs in your area; call to find out whether there's a state write-off.
When to act: now. Some states put an annual cap on the credits that can be given out. So the closer to the end of the year, the greater chance the breaks will be exhausted.
Added benefit: no strain on your December budget.
Between holiday entertaining and gift buying, you may not have enough cash left over to cover all of your charitable intentions.
If next month's budget won't be so tight, charge a contribution you know you'll be able to pay from January's income. The IRS lets you claim the deduction when a credit transaction is made vs. paid.
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