As calendar year 2008 draws to a close, taxpayers are reminded to consider year-end tax planning strategies to minimize their overall income tax liability. If you expect your income to be higher in 2008 than in 2009, or if you anticipate being in the same or higher tax bracket in 2008, then you may want to consider accelerating deductions, such as the itemized deduction for charitable contributions, into calendar year 2008. One of the deductions that is also allowable for alternative minimum tax purposes is the itemized deduction for charitable contributions.
Accordingly, this article will discuss some of the common ways to make charitable deductions.
Remember that a mere pledge is not deductible unless it is paid prior to January 1. A tax advantaged way to satisfy a pledge without incurring capital gains taxes is to consider giving appreciated property to a qualified charity. If the property is long-term capital gain property (generally stocks or bonds that have been held more than one year or investment real estate that has been held for more than one year), the donor should receive a deduction equal to the fair market value of the long-term capital gain property without being taxed on the embedded capital gain. The deduction is limited to 30% of your adjusted gross income, however, any excess deduction may carryover to the subsequent five calendar years.
Regarding charitable contributions, you should remember the following additional rules: (1) no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better; (2) the IRS may deny a deduction for any item with minimal monetary value; and (3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return. Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record or receipt from the charity showing the name of the charity, and the date and amount of the contribution.
The ability to transfer to charity up to $100,000 from a traditional or Roth IRA maintained for an individual who has reached age 70 1/2 continues into 2008. Ordinarily, such transfers would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on certain, itemized charitable contribution deductions. An IRA transfer to a qualified charity also allows the retired individual to apply the charitable transfer to his or her required minimum distribution amount in 2008. The transfer must be directly from the IRA trustee or custodian to the charitable organization.
In addition, if the donor is planning to claim a donation for a motor vehicle, a boat or similar property which has a value of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the charity sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received by the charity from the sale.
If you have any questions concerning the rules relating to year-end charitable contributions, don’t hesitate to call a member of the Tax Practice Group. Any significant charitable contribution planning also should be coordinated with your tax return preparer prior to making the contribution.