Philanthropy Helps Society--and Your Tax Bill

Individuals who have a philanthropic bent will find that their generous ways pay off at tax time.

Charitable contributions generally give you dollar-for-dollar deductions on your federal tax return, and they often secure you a break when paying state taxes as well.

Of course, you never recoup all of your gift through tax breaks. But if you are in the highest tax brackets, the federal and state governments effectively pay for between 20% and 40% of your gifts--depending on where you live and how much tax you pay.

These final months of the year, moreover, are the best time to give generously. Not only is the need for your funds great, but you generate the deduction just in the nick of time.

By waiting until the last minute, you could benefit by receiving interest on donated money all year. If you gave last January, you will still get the same deduction in 1991, but you will have lost the use of that money for 10 to 12 additional months. And even conservative investors could have earned a 5% rate of return on their money over the course of the year.

There are several ways to give, of course. You can simply give cash. You can give away used items, such as clothing and furniture. Or you can give away appreciated property.

The best option for you will depend on your situation. But it’s difficult to think of a reason not to take the time at least to go through closets, garages and attics and donate unneeded but usable items that are simply gathering dust.

Despite the hours of cleaning usually spurred by such an exercise, donating personal property is the easiest and least painful type of giving. You get rid of items you probably haven’t used in years, and the Internal Revenue Service allows you to deduct an amount on your taxes roughly equal to the current market value of the goods.

How do you estimate the value of your deduction? Usually, by valuing donated items as you would for a garage sale. If you put too high a price tag on them, however, you may lose the deduction in a later audit.

There are a few things that you need to keep in mind if you give away a lot of personal property.

If you donate items that have a market value of more than $500, you’ll need to file an additional form with your tax return saying who was given the stuff and what it was worth. There is no law requiring that you keep documentation acknowledging the gift, such as a letter or receipt from the charity. But if you don’t have it and you do get audited, you might have trouble justifying the deduction.

If the goods you have donated have a claimed value over $5,000, the IRS will require a contemporaneous appraisal to be attached to your tax return.

Another way to give is to donate appreciated property, such as stock, bonds, artwork or real estate. The advantage is two-fold: You get a bigger deduction and the charity gets a bigger donation because you have deferred paying taxes on the increased value of the property.

For example, consider someone who had stock worth $10,000 that they had purchased for $5,000. If they sold the stock and gave the proceeds to charity, they would have to pay tax on the $5,000 gain. At 28%, the tax would amount to $1,400. Then, theoretically, they would only be able to contribute $8,600 ($10,000 minus the tax of $1,400) to the charity.

Since they would now have a smaller donation, they’d also get a smaller deduction. Their $8,600 gift generates a tax savings of about $2,400.

Now consider what happens if this individual donates the stock to the charity instead of selling it and donating the proceeds.

The individual generates a $10,000 deduction, worth $2,800 in tax savings at a 28% rate. The charity gets $10,000 worth of goods--$1,400 more than before. And since the charity had no profit on the stock--you, not the charity, earned the profit--it won’t have to pay tax on the gain and neither do you.

If, on the other hand, you want to give away something that has declined in value, you should sell it first and then give away the proceeds. That way, you get the investment loss. The charity gets the same amount either way.

If you give publicly traded stock, where the value is easy to quantify, you do not need to get an appraisal, tax experts say. If the investment’s value, however, is not easily ascertainable, you will need an appraisal, just as you would when giving depreciated property of high value.