How to Make the Most of Charity Donations

It’s not too late to give to your favorite school, church, arts group or other charitable organization--and get a 1989 tax deduction to boot. But be sure you know how to make such contributions properly so you can get maximum tax savings.

One of the most common mistakes people make with charitable contributions is to give cash instead of stocks or other securities that have appreciated in value. When you give securities that have risen in value, you forgo paying capital gains taxes on them. But if you give cash, you are giving an asset that has already been taxed.

Even if you like a particular stock and want to keep it because you think that it will rise further in value, give it anyway. Use the cash you would have given to buy new shares of the same issue. That way you will forgo capital gains tax and still own the same stock. You will also establish a higher “cost basis”--the price at which you bought the stock--lowering the potential capital gain subject to taxes.

There are some exceptions to this rule. One is if you are subject to the alternative minimum tax. In that case, the capital gains may still be taxable, so you might be better off giving cash. To figure this out, consult a tax adviser.

Also, if your stock has fallen in value, then you’re better off selling the stock and giving cash instead. That way you can claim a capital loss, which you can then use to offset any capital gains you may incur now.

You should also plan carefully about how you give art, antiques or other collectibles that have appreciated in value. You can deduct their fair market value under one key condition: You must donate them to an organization that will use the objects as part of its charitable purpose.

That means giving paintings to a museum, or rare books to a library. If the recipient can’t use the objects as part of its charitable purpose, then you can deduct only what you paid for them. That may be far less than their value now.

If the items you wish to donate are worth more than $5,000, or if there is a chance the Internal Revenue Service may question their value, get an appraisal by a qualified professional.

Here are some other tips for charitable giving, courtesy of the Council of Better Business Bureaus and other experts:

- You can deduct your donations only if you itemize and only in the year you make them. Pledges are not deductible until the year in which they are paid.

- You can’t deduct direct contributions to needy individuals. Instead, donations must be made to organizations qualified to accept tax-deductible donations. So if you plan to give food to the homeless, give it to the charity that’s feeding them.

But be careful about which groups you give to. Millions of dollars in donations go to sophisticated hucksters who line their own pockets rather than help the needy, a Senate panel was told Friday.

- If you receive gifts, goods or services (such as a dinner) in exchange for your donation, it is deductible only to the extent that your contribution exceeds the value of the benefit received.

- You can deduct the fair market value of clothing, household goods or other items donated to a thrift store as long as the store is operated by a qualified charity, like Goodwill Industries or the Salvation Army. To determine fair market value, visit a thrift store and check prices on comparable items.

- You cannot deduct the value of volunteer time you donate to a charity. However, out-of-pocket expenses incurred while volunteering--such as costs of driving to meetings, phone calls, stamps--are usually deductible. You can write off 12 cents for every mile you drive to and from charitable activities.

- If you’re in doubt about the rules for donating, call the IRS at (800) 424-FORM and order Publication 526, “Charitable Deductions”; Publication 529, “Miscellaneous Deductions,” or Publication 561, “Determining the Value of Donated Property.”