The Smart Tax Break You Shouldn't Miss

As the end of the year approaches, your favorite charities will start knocking on your door. With the economy in the doldrums, charitable organizations are more nervous than ever -- and they'll want to nail down whatever donations they can.

This year, more than a third of charities have reported decreased contributions -- and nearly half expect further declines for the 2008 holiday season. That's critical, because charities tend to focus on the end of the year for their major fundraising drives. That way, they can capitalize on prospective donors who are also interested in maximizing whatever tax deductions they can get for their gifts.

So there's no doubt: Your support is important. But before you cut a check, take a moment to figure out the best way to make the most of the donations you're planning to make. Here are some ideas on how best to handle your 2008 gifts.

Give smart
Charities give donors lots of different ways to make gifts. You can send a check, have your credit or debit card billed, or even have the charity bill you in installments.

But often, the best way to maximize your tax savings is to make charitable gifts using appreciated stock. If you have shares that have risen in value over the years, you can get a full tax deduction and avoid capital gains taxes by giving them to charity.

You might think that given the crummy market, no one has any appreciated stock left. But for those who've bought and held stocks for the long term, there are still a number of stocks that have doubled or more in the past five years:

Stock

5-Year Total Return

Apple (Nasdaq: AAPL  )

863%

GameStop (NYSE: GME  )

232%

McDonald's (NYSE: MCD  )

150%

Chevron (NYSE: CVX  )

148%

Public Storage (NYSE: PSA  )

136%

Raytheon (NYSE: RTN  )

109%

Davita (NYSE: DVA  )

106%

Source: Yahoo! Finance.

Giving shares can be easier than you think. Typically, a charity will have a brokerage account that accepts stock gifts. All you'll need to do is to call your broker and have him or her transfer shares to the charity's account. Just don't leave this to the last minute, because brokers get swamped by these requests as December goes on.

Other key points
Keep these thoughts in mind as well as you prepare to give:

  • Know your charity. For you to get a tax deduction for your donation, your charity has to meet certain requirements. Many organizations, such as political groups, don't qualify. And unfortunately, many scam artists try to solicit donations for charities that don't even exist. So if you're not sure whether a charity will get you a tax deduction, check it out -- this IRS page can help you with your due diligence.
  • An IRA trick. In 2007, you could give up to $100,000 to charity from your IRA without paying tax. That provision was originally scheduled to expire at the end of last year, but the bailout bill renewed it for this year and for 2009.
  • Get what you need. It used to be enough to keep a copy of your check handy to document your tax-deductible contributions. But that's no longer true. You should at least get an acknowledgment letter from your charity that states the amount of your gift. Certain types of gifts, such as donating cars or other property, often need additional documentation. Keep all of this documentation with your tax filing information.

Most of all, don't let tax considerations be the only motivation for your charitable giving. Although the tax benefits are nice, the good you do is worth so much more.

Our annual campaign, Foolanthropy 2008, is in full swing. This year, we're supporting financial literacy. Vote for your favorite organization now through Nov. 6!

And learn more here:

Thanks for your support!

Fool contributor Dan Caplinger always looks for good tax breaks. He doesn't own shares of the companies mentioned. GameStop and Apple are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is always smart.


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