Americans are big givers, especially during the holidays, but there are several ways we could be smarter givers. Follow these three tips, and you can maximize the impact of your donations.
Take Your Deduction
If you’re like a lot of people, you’ll probably drop some cash into a Salvation Army kettle at some point in the next few weeks. What if you could find a way to give 25 percent more? It’s as simple as writing a check instead of using cash.
For example, if you drop a $10 bill into the red bucket 10 times over this holiday season, that’s $100. If you and your spouse together earn more than $74,000, you pay taxes at the 25 percent tax rate. Giving a check for $100 and then taking the deduction on your tax return saves you $25. You can add that $25 onto your next check for the red bucket.
You can also give using a debit or credit card—the key is that you get some kind of documentation for your gift.
Donate Stocks
Will you give $1,000 to your favorite charity by year’s end? It might be a better idea to donate stocks instead.
Review your holdings on the investment statement for your taxable account. Choose the investment with the highest gain, in percentage terms. Donate shares of that one to your charity instead of cutting a check. Why? Your charity won’t pay taxes on the capital gains, but you would.
Let’s say you bought Microsoft at $20 per share years ago. A share is now worth $50. Your gain is 150 percent. If you sell 20 shares to raise the $1,000 to donate, you’ll pay taxes of about $120 for federal and state taxes. If you simply send a check to your favorite charity, you are really paying about $1,120, but if you give the shares, you pay $1,000. By gifting larger amounts, say $3,000, you could save more—about $360 in this example.
Some people like to make weekly or monthly donations throughout the year, possibly via automatic withdrawals from a checking account. The end of the year could be a good time to shake things up. Stop those automated payments and instead make a one-time gift in 2015 using an appreciated investment.
Get Your Documentation Straight
Lastly, don’t let a lack of documentation cost you the tax deduction you deserve.
Find your marginal tax rate on the summary page from last year’s tax return. If that tax rate is 25 percent and you gifted $1,000 this year, then you’ll save $250 on your taxes. Those are real savings, but you need to follow the rules.
If you give less than $250, the IRS will want to see a copy of the check or a credit card statement. Ask your charity for a receipt showing your name, the amount and the date.
If you donate more than $250, that receipt must state if the charity gave you any goods or services in return for your contribution, and if so, the receipt must describe those along with a good-faith estimate of the value. You don’t want to be the taxpayer who was denied a big deduction because he failed to get the right documentation.
Don’t forget to ask for that receipt. If you’re dealing with a smaller charity that lacks in-house financial advice, you might need to remind them of the rules.
