The tax law gives you plenty of leeway to deduct contributions within generous limits. In fact, if you're like most donors, you probably aren't even aware that any limits exist.
Strategy: Keep your eye on the ball. If you're not careful, you could easily bump up against the tax-law limits when they interact with one another. In some cases, you could lose your deduction forever!
Write off up to half your income
For starters, you can deduct qualified charitable donations up to 50 percent of your adjusted gross income (AGI). Being able to write off contributions up to half your income is pretty generous right there. Your contributions must be to public charities, such as hospitals, churches, schools and the like; or private foundations. These are sometimes called "50 percent charities."
One caveat: If you give appreciated assets that you've held for more than one year to a 50 percent charity, your deduction is limited to 30 percent of your AGI.
The rules become even trickier for gifts made to non-50-percent charities (semi-public or private charities). In that case, your deduction is limited to the lesser of (a) 20 percent of your AGI or (b) the amount by which 50 percent of your AGI exceeds your gifts to 50 percent charities before any reduction by the 30 percent limit.
Example: maximizing your benefits
Let's say your AGI will be $200,000 for 2005. During the year, you will:
• Give $10,000 to your local church.
• Give $20,000 to a veterans' association that's a non-50-percent charity.
• Plan to give stock to your alma mater that you bought for $10,000 years ago. It's now worth $90,000.
The total value of your gifts for 2005 adds up to $120,000. Bad news: You can deduct only $70,000 on your 2005 return. Why?
The $10,000 donation to the church is fully deductible. But the 30 percent limit applies to the $90,000 gift to your alma mater, so you can deduct only $60,000 of the stock's value. The extra $30,000 that's disallowed must be carried over to 2005 (see box at left).
Even worse, you can't deduct any part of the donation to the veterans' association, even though it's less than 20 percent of your AGI. That's because the gifts to the church and the school equal $100,000 before any reduction under the 30 percent rule. So, you're already at 50 percent of your AGI. And, to add insult to injury, you can't carry over the deduction for the gift to the non-50-percent charity until next year.
Better strategy: Make sure you stay within all the tax-law limits before giving gifts to charities.
If you plan on giving $10,000 to your church and $20,000 to a non-50-percent charity, that gives you room for a $70,000 donation under the 50 percent cap. So, keep stock worth $30,000, and give away the rest of the stock—valued at $60,000—so you don't exceed the 30 percent threshold.
That way, you can deduct the entire value of the cash and stock you donate in 2005 ($90,000). In other words, you're giving away less than you did before, but you're deducting more.
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