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, it also might help you lower your tax bill.
Some older taxpayers will find giving easier, but those who donate household goods are going to have to do a little extra work. And all taxpayers who donate cash, regardless of the amount, must deal with more documentation.
The one other thing to remember is your philanthropic timing. So that 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 70½ or older, you can have money from your IRA sent directly to a charitable organization. Traditional IRA and Roth account holders can do this, but it's probably more beneficial to traditional IRA account holders, because much of the money in these accounts is eventually taxable. Now, however, the cash that goes straight to the charity is not counted as taxable income to the IRA owner.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 age 65 or older.
Thanks to the rollover option, standard deduction filers now won't miss this potential deduction just because they don't itemize. In fact, some taxpayers might be better off, particularly those who must take required minimum distributions but don't need the money for day-to-day expenses. In these cases, they won't have to pay taxes on the IRA distributions that are directly donated.
The IRA donation rollover 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.
'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 new 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.