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When the giving season meets tax season


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POSTED: Sunday, December 06, 2009

In the world of taxes, there are two types of gifts: gifts to charitable organizations and gifts to everyone else. Both types have their own benefits and income tax implications.

Giving to charity is one of the best tax-planning opportunities because you enjoy not only a sizable tax deduction, but also the satisfaction of doing good. Plus, you can control the timing of your deductions throughout the year to maximize your tax benefits.

Outright gifts of cash (which include gifts made via check, credit cards and payroll deduction) are the easiest. You can deduct cash gifts up to 50 percent of your adjusted gross income (AGI) made to public charities or public operating foundations. To claim the deduction, make sure you can substantiate it. Cash donations under $250 must be supported by a canceled check, credit card receipt or written communication from the charity. Cash donations of $250 or more must be substantiated by the charity in writing.

Gifts of property are a little more complicated, but they may provide more tax benefits when planned properly. Ordinary income property includes items such as stock held for less than a year and inventory. You can receive a deduction equal to the lesser of fair market value or your tax basis (limited to 50 percent of your AGI). Long-term capital gains property includes stocks and other securities you've held more than one year. It is one of the best charitable gifts because you can take a charitable deduction equal to its current fair market value (limited to 30 percent of your AGI). In addition, if the property has appreciated in value from the time you acquired it, you can avoid paying capital gains taxes you would incur if you sold the property.

A different set of rules applies to gifts given to individuals. While you do not receive a deduction for gifts made to individuals, gifting remains a good estate-planning strategy. If you are fortunate enough to have an estate to pass on to your heirs, taking steps to minimize transfer taxes, such as the estate tax, is as important as ever.

One of the easiest estate-planning strategies is to make gifts each year. The annual gift tax exclusion for 2009 is $13,000 for each person for the year. You can double this generous exclusion by electing to split a gift with your spouse ($26,000 in total). So, if you want to give to four separate people, you and your spouse could gift a total of $104,000 this year with no gift tax consequences.

To maximize tax benefits, choose your gifts wisely. If you choose to give property rather than cash, give property with the greatest potential to appreciate. Don't give property that has declined in value. Instead, sell the property so you can take the tax loss, and then gift the sales proceeds.

You also can avoid gift taxes by paying tuition and medical expenses for a loved one. As long as you make payments directly to the provider, you can pay these expenses gift-tax free without using any of your annual exemption.

The holiday season is often considered the season of giving. Whether you make gifts to loved ones or worthy charitable organizations, you should also take advantage of the tax benefits of making such gifts.