Charitable Giving—Personal and Financial Incentives

By Gail Osten
November 2014 View more Finance

Indeed, charitable giving can be a worthy personal endeavor, and in the process, it can also offer a financial incentive by lowering your tax bill. But there are a few facts to know, rules to follow, and potentially intelligent ways of donating you may not be aware of.

The Giving Process

Jim Stoops, financial consultant at Charles Schwab’s Naperville branch, recommends you keep your tax professional in the loop on the finer details of taxes related to charitable giving. Stoops emphasizes approaching charitable giving holistically—and in an organized way—as part of your own unique financial goals.

First, the standard deduction for the 2014 tax year is $6,200 for singles, $12,400 if you’re married and filing jointly. If your itemized deductions are higher, there are additional IRS rules to consider, so here’s where you should consult with your tax professional.

Cash Contributions

With cash contributions, keep receipts or corresponding bank records that include the date, amount and name of the charity. Non-cash contributions, like clothing or household goods, require documentation, too. For donations over $250, retain a receipt with the organization’s name, donation date and place of the contribution, plus include a description of the donation. If your combined contributions for the year exceed $500, you’ll file a Form 8283 with your taxes, and for non-cash contributions worth more than $5,000, you’ll definitely need a written appraisal, says Stoops.

Valuing Items You Donate

Valuing items you donate can be tricky. Is the blouse that you paid $50 for several years ago now worth $10 or $1? Here’s where the IRS’ fair market value comes into play. “Fair market value (FMV) is the price that property would sell for on the open market – the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts,” said Stoops. Be realistic, considering the age, condition and style of the item. According to the IRS, “You cannot take a deduction for clothing unless it is in good used condition or better. An item of clothing that is not in good used condition, or better, for which you take a deduction of more than $500 requires a qualified appraisal.” See www.irs.gov/publications/p561 for more examples of FMV.

Charitable Organizations

Know that nearly all 501(c)(3) organizations are eligible to receive tax-deductible contributions. But before you donate, ask the charity you plan to donate to about its tax status. Or, to make it easier, enter “Exempt Organizations Select Check” in your web browser for IRS guidance on these organizations.

Stoops notes that there are many ways to benefit the charity and your bottom line—including gifting an appreciated stock that you’ve owned for more than a year. “If you sell an appreciated stock, you will owe capital gains tax. Instead, give the stock tax-free to a qualified charity and also receive the charitable tax deduction equal to its full market value,” said Stoops.

Stoops also suggests considering a donor-advised fund, which is money managed by a charitable organization on behalf of many donors. You can open this type of account with a tax-deductible contribution, then make grants to any public charity over time, contributing a variety of tax-deductible assets.

“While most people think of a donor-advised fund as a tax-smart way to give during their lifetime, they can also support estate and legacy planning,” Stoops says. “You can make the account the beneficiary of a will, retirement account, and/or trust to help reduce your taxable estate while continuing your giving beyond your lifetime. Plus, it’s easy. The fund sponsor handles all the administrative details.”