Navigating the Tax Rules on Charitable Gifts

FROM NYTIMES.COM

Congress has been tightening the rules on charitable gifts for more than a decade, and following those rules is critical to getting the maximum deduction for gifts. Below, in time for year-end tax planning, are some common charitable giving pitfalls and how to navigate around them.

RECEIPTS
You need a receipt to deduct $250 or more. A canceled check is not sufficient. The receipt must be “contemporaneous” with your gift, and it must specify whether you received any benefit, such as a meal, and its estimated value. Failing to obtain a proper receipt can result in a tax bill, including interest and a 20 percent penalty.

I.R.A.s
 Through last year, those at least age 70½ could donate directly from an Individual Retirement Account, with the gift counting toward the annual minimum distribution that any I.R.A. holder is required to take once reaching that age. This was a great deal for people not itemizing deductions, because a donation from an I.R.A. did not have to be recorded as taxable income, unlike the rest of the distribution.

The House has passed legislation reinstating this provision, but so far the Senate has not. If you have already donated from an I.R.A. this year, you may still get a tax break even if the Senate does not act — if you itemize deductions. Report the donation as income and then take a deduction. Those who do not itemize are out of luck.

USED GOODS
Donations of used goods like clothes are limited to their fair market value, which means what the charity can sell it for. Goodwill has a handy guide on valuing such donations. You also need a receipt from the charity describing the property, its value and when it was donated. The I.R.S. may limit your deduction to the amount the charity received, a rule most often applied to donated automobiles.

If the value of one item exceeds $500, you generally need an appraisal, and you must fill out Section A of Form 8283. For donated property valued at more than $5,000, other than publicly traded stock, you must also complete Section B of I.R.S. Form 8283.

The higher the value of the items, especially art and other hard-to-value objects, the stricter the rules. If you donate art worth $20,000 or more, the appraisal must be attached to your return.

STOCK
Donating publicly traded shares that have risen in value can help maximize tax savings, but you have to do it right.

When donating shares owned for at least a year and a day, you can deduct the full value — both what you paid and the appreciation — without reporting the gain as income. The charitable deduction can then offset other earned income you report. You must also fill out Section A of Form 8283.

Your deduction will be based on the midpoint between the shares’ high and low market prices on the day of your donation.

Tax deductions for gifts of appreciated property are also limited to 30 percent of your adjusted gross income (the last line on the first page of your Form 1040 tax return) provided you give to a public charity like a church, community foundation or college. A 20 percent limit applies to gifts of appreciated property to private foundations. Gifts that exceed these limits can be deducted over the next five years.

Never donate shares held for less than a year and a day, because you will be allowed to deduct only the price you paid, not any increase in share price. If you own shares that have lost value, a good strategy is to sell them, creating a tax-deductible loss, and then donate the cash received.

CLOSELY HELD STOCK
Timing is crucial when donating shares of a family business or other closely held corporation that is being sold. “You want to give the charity the stock before the deal is a foregone conclusion,” said Anne O’Brien of Caplin & Drysdale, a tax law firm in Washington. If you wait for a sale is to be certain you can deduct only your original cost, called the cost basis.

Family businesses can also benefit from gifts of shares by the older owners to a charity and a subsequent sale of those shares to younger family members. But the full value of the gift must be recognized both when donated and when resold to avoid a big tax bill.

For your gift to qualify for the charitable deduction, the receiving charity must have unfettered authority to sell; such gifts are generally not public knowledge, but care should be taken not to give so many shares in any one gift that an unfriendly party could gain control of the business.

To keep people from gaming the system by claiming a high donation value and then having relatives buy them from the charity at a discount, the I.R.S. requires charities to report the sale price on Form 8282.

By comparing the values on Form 8283 and Form 8282, the I.R.S. can determine whether the tax deduction was proper. Most charities seek to immediately sell donated shares. But if the charity holds on to the shares for more than three years — which is likely only if a large dividend is paid — it does not have to file Form 8282.

EASEMENTS
When a landowner grants an easement to a charity — often for conservation purposes — this may qualify for a deduction reflecting the reduced value of the land. But Tim Lindstrom, a lawyer in Washington, Va., warns that greed results in tax headaches. “An easement is a contribution, not a way to make money,” he said.