The holiday season brings out the Santa Claus in all of us. According to Charitynavigator.org, in a typical year, 50 percent of all charitable gifts are made between the day after Thanksgiving and the end of the year.
But just because your clients are feeling generous at this time of year, that’s no reason for them to act foolish. There are simple rules to follow that can maximize the benefit not only to the client’s intended beneficiary but to the client’s financial well-being as well.
Here are a few tips that can help your clients get the most out of their desire to do good:
1. Do your homework on the recipient. Make sure the chosen charity gets a lot of bang for the buck. Any charitable institution worth its salt will be happy to open its books to someone who wants to make a sizable donation. Help the client find out exactly what their donation will pay for.
2. Make sure the client can itemize. Clients who are in a position to claim only the standard deduction should be warned that they won’t get as much benefit from a charitable donation. If that’s the case, a careful perusal of their tax situation might help them figure out how much they would need to donate to make itemizing deductions a more profitable alternative. Watch out for also for the Alternative Minimum Tax; if the client has been subject to AMT in the past, they may not be able to itemize on their 2013 return either.
3. Make sure the charity is IRS qualified. Every organization that has legitimate tax-exempt status should have an authorization letter from the IRS. You can also find a full list of fully authorized tax-exempt groups at IRS.gov, in IRS Publication 78, or call the IRS at 1-877-829-5500.
4. Consider giving stock. There are real tax benefits to giving gifts of appreciated stock, and for most charities, they’re no different from a gift of cash. If your client donates appreciated stock, they get the chance to write off the value of the stock at the time it was donated. At the same time, though, the client can avoid having to pay capital gains taxes on the appreciated value of the security.
5. Be careful with noncash contributions. The rules are a little different for people donating goods rather than cash. If the value of the donated item exceeds $5,000 — say, for instance, the client wants to donate a car — the item must be appraised in writing. There’s also a special form to fill out: Section B of Form 8283.
6. Get a receipt, if you can. The IRS wants all monetary donations to be substantiated. That can be via a receipt from the charity, but it can also consist of a bank record showing the transfer of funds or a canceled check. If the donation is for $250 or more, the IRS wants you to have an official receipt. Also, the person claiming the deduction doesn’t have to worry about having those records to file at the time of the return. In the case of an audit, it will have to be produced, but generally not until then. 7. If you volunteer, deduct your expenses. The time a client spends volunteering for a charity can’t be monetized and written off. Neither can services that were provided to the charity at no cost. But expenses are deductible. Travel costs incurred while working on behalf of a charity are deductible, including the cost of gas. If it’s too much of a hassle to keep track of the cost of the gasoline, the client can simply deduct 14 cents per mile.
8. Make the payments on time. If the client has pledged to pay $1000 to a charity but has contributed $500 by year’s end, only that $500 is deductible. But a credit card payment or check counts as a payment in 2013 even if the transaction isn’t completed until 2014. However, if the client wants to push the deduction into 2014, he or she can pledge to the charity now and write the check in January.