Published Thursday, September 8, 2016 at: 7:00 AM EDT
If you're looking for ways to cut your taxes before the end of the year, consider donating cash or property to a qualified charitable organization. Besides helping out a worthy cause, you can reduce your annual tax bill, as long as you adhere to the rules. But there are several potential obstacles to overcome.
For starters, you generally can deduct the full amount of cash contributions to charity as long as the total doesn't exceed 50% of your annual adjusted gross income (AGI). (If you give more than that, you can carry the excess forward to future tax years.) Yet the IRS insists on strict recordkeeping for cash and cash-equivalent donations.
To claim a deduction, you have to be able to provide a bank record or a written communication from a qualified charitable organization, required for gifts of $250 or more. Such a notification must show the amount of the contribution, the date it was made, and the name of the charitable organization. And you need to have it in hand by the date you file your return or the date that it's due, plus any extensions.
Things get more complicated if you give gifts of appreciated property. Generally, such donations are limited to 30% of your AGI, with any excess deducted in future years. But if you donate securities that would have produced a long-term capital gain (on investments you'd held for more than a year) if you'd sold them, you can write off the property's fair market value (FMV) on the date of the donation. Otherwise, the deduction is limited to what you paid for the property.
Suppose you donate stock to a qualified charity in December. You acquired the shares for $3,000 two years ago and the FMV is $5,000 on the date of your donation. In this case, your deduction isn't limited to $3,000—you can deduct the entire $5,000, and you avoid paying taxes on the $2,000 that the shares appreciated.
Other special rules may come into play. For instance, if you donate artwork to charity, the art must be used to further the charity's tax-exempt function. So a gift to a museum that shows the art should qualify for a deduction.
Finally, keep in mind that most itemized deductions, including those claimed for charitable contributions, are reduced for high-income taxpayers under something known as the Pease rule. Your tax advisor can tell you more.
Charitable donations can be made through New Year's Eve and still qualify for a deduction in the current tax year. And if you make an online contribution on December 31 and charge it to a credit card, it still will count as having been made this year—even though you won't pay the bill until next year.
This article was written by a professional financial journalist for The Hogan-Knotts Financial Group and is not intended as legal or investment advice.