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Gifts to charity pay off on your taxes

Taxes » Tax Deductions » Gifts To Charity Pay Off

When preparing your federal tax return, don't forget to count your gifts to charity. Your giving attitude can do more than make you feel good for helping others. When tax filing time arrives, your gifts also might help you lower your tax bill since they may be deductible donations.

There are many ways to give, the most common being cash donations. In the Internal Revenue Service's dictionary, cash includes not just currency, but also monetary amounts donated by check, credit card and cellphone texts. When you do donate money, be ready to deal with IRS documentation rules.

The one other thing to remember is your philanthropic timing. So your donations will count when you file your return in the spring, make sure your charitable gifts are made by Dec. 31 of the previous year.

IRA direct rollover

If you are 70 ½ or older, you can have money from your individual retirement account sent directly to a charitable organization. Both traditional IRA and Roth account holders can do this, but it generally is more beneficial to traditional IRA account holders because much of the money in these accounts is eventually taxable.

Older traditional IRA owners must take required minimum distributions, or RMDs. With the charity rollover option, they can meet this requirement by having up to $100,000 of their annual RMD go straight to an Internal Revenue Service-qualified charity. That way, they comply with the RMD rule, but the distribution is not counted as taxable income to the IRA owner.

The charity rollover option also might be a good strategy for individuals who face donation limits based on their income. Generally, you cannot donate an amount that exceeds 50 percent of your adjusted gross income. But when the money goes directly to the charity from the IRA, it doesn't count against that limit because it's not included in the filer's gross income.

The one drawback is that such direct gifts are not deductible by the donor. That, however, might not be that much of a disincentive.

Taxpayers must itemize to claim any charitable deductions. But many older taxpayers, like the majority of filers of all ages, choose to claim the standard deduction instead. In fact, many older taxpayers find the standard amounts even more appealing because they are larger for filers 65 or older.

The IRA rollover to charity option gets special treatment for the 2012 tax year. The option technically expired at the end of 2011 and was not renewed until Jan. 1, 2013, as part of the American Taxpayer Relief Act of 2012, also known as the "fiscal cliff" tax bill.

Under the new law, taxpayers who took RMDs in December 2012 can donate cash equal to that distribution (again up to the $100,000 limit) to charity between now and Jan. 31. That contribution amount then would not count as taxable income for the 2012 tax year.

Any 2013 IRA contribution of RMD money, however, must be made as a direct transfer between the retirement account and the charity.

'Good' household goods

Many charities are happy to accept used clothing and household goods, and you're allowed to claim the fair market value of those items as a tax deduction. But to make sure that the value was at least somewhat valuable, a law was enacted in 2006 that requires any donated household goods be in good or better condition. The change was designed to solve two problems.

First, some taxpayers were using charitable organizations as dumping grounds for articles that really should have been put in a garbage can instead of a donation bin.

Secondly, the value of these donors' claims on the raggedy goods was much too high, meaning they got a larger tax break than they should have. This is the same issue lawmakers confronted when they tightened rules a couple of years ago on donated cars.

Now the IRS can deny deductions for items that are deemed of "minimal monetary value." When your total amount of donated articles -- or as the IRS calls them, noncash gifts -- exceeds $500, you have to file with your tax return Form 8283, Noncash Charitable Contributions, detailing your generosity. Taxpayers still can inflate the used property's value on the form, but with the new guidelines and charitable groups' reminders of it, lawmakers are hoping that individuals will follow the new rules. From the enforcement side, don't be surprised to find tax examiners taking closer looks at this form and asking more follow-up questions than usual about deductible donations.

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