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5 Tips for Tax Time*

While we would like to continue having sugar plums dance in our heads, the end of 2009 is rapidly approaching. We all know what that means – year-end tax planning and how charitable contributions might benefit those organizations we care about and our own bottom line.

Of course, the economic situation has influenced many donors' approach to giving. In economic downturns, donors "concentrate their giving to a fewer number of organizations but continue to support those that they are either engaged in personally," said Edith Falk, chair of the Giving USA Foundation, "or that they feel are really making a difference in their community."

The year-end donation season represents as much as 50% of some charities total annual fundraising receipts, Falk said. If you're among those planning to give this year, the time is now. Here are 5 tips to consider as tax-saving charitable contributions.

1. Give a gift of appreciated stock. If you’re holding stock that worth significantly more that what it cost, the appreciated shares can be given directly to a charity. Don't sell the security and donate the cash: You get the deduction but you also get hit with the capital-gains tax.

"If you rebalanced your portfolio and harvested some of those losses last year or in early 2009, there's probably been some fairly good appreciation during 2009," said Rick Rodenbeck, tax practice leader with CBIZ MHM in Kansas City. By donating the appreciated security, you avoid the capital-gains tax hit, but you can still deduct the security's fair market value. Donate only long-term holdings--those held for a year or longer.

Those eager to donate appreciated stock need to get those securities to the charity by Dec. 31 to claim the deduction on their 2009 taxes, said Stephanie Hines, tax senior manager with BDO Seidman in New York. While a cash donation can be mailed--rather than received--on that date and still be deducted on the 2009 tax form, the appreciated security, has to be received by 12/31," Hines said.

With a stock that’s lost value, the donor might have more of a tax-advantage to sell the depreciated stock first, in order to realize the loss, and then give the proceeds to charity. The donor receives a charitable deduction for the gift and may use the realized loss to offset future capital gains.

2. Set up a Donor-advised Fund.  Another strategy that takes time to put in place: setting up a donor-advised fund. This gives the donor a tax deduction for a contribution up front, and then the contribution is distributed to one or more charities over time (subject to certain limitations).

Setting one up requires less legal assistance and administration. Rather than forming a private foundation, donor-advised funds are administered by an established community foundation. Locally, those include Community First Foundation, The Denver Foundation or Rose Community Foundation. Contributions are usually irrevocable and once made, the donors have no right to income or principal.

3. Direct IRA distributions to a charitable organization.  A big perk for one taxpayer group: IRA owners who are older than 70 ½  can transfer up to $100,000 to charitable organizations without having to count that money as income (see below if you are 59 ½ or older – there is a benefit for you too).

The provision is set to expire on Dec. 31, but on December 9th the U.S. House of Representatives passed an "Extenders Bill," giving new life to this provision, plus a number of other tax provisions that would otherwise end this year. Now taxpayers will have to wait to see what the Senate does.

Ironically, the provision is a boon to those people who are forced to take required minimum distributions they don't need. The transfer to a charity satisfies the requirement but allows taxpayers to avoid an income-tax hit. In 2009, Congress temporarily waived the rules to avoid forcing people to withdraw money when their account was down, but the waiver was not included in the bill that the House passed Wednesday.

If you are 59 ½ or older, you can still withdraw money from your IRA to make a contribution to a charity without penalty. But, the distributions will be included in your taxable income and the charitable deduction can only be used if you itemize your deductions.

4. Set up a Charitable Lead Annuity Trust.  Just as it makes sense to create a spending plan, it makes sense to have a charitable-giving plan, so you know where your money is going and why. "Have a gifting plan," said John Bock, senior vice president with Key Bank, in Burlington, Vt. "Who are you trying to help?"

There are plenty of products to help manage that plan. One popular vehicle right now: charitable lead annuity trusts. The trust pays out money to the charity until a set point in time, when the assets go back to the original owner or to that person's beneficiaries.

Because interest rates are low, these types of trusts are valuable, Bock said. "Essentially, you get a bigger deduction now so you can then pass more on to your beneficiaries without tax," he said.

5. Donate cash.  Last but not least, it goes without saying that cash (in the form of checks and credit card donations) is always appreciated and the amount is deductible if you itemize.

Before creating your strategy, consider the rules of charitable contributions. The charity must be qualified (a tax-exempt 501(c)(3) as determined by the IRS), and the gift must be donated to the qualified organization, not an individual. Also consider the amount you can deduct in a year. There are limitations.

Consult with a tax advisor when planning your year-end charitable contributions so that you are certain of the tax benefits (or consequences) depending on your individual situation. And don’t forget, since 2007 taxpayers must keep receipts documenting all monetary donations they claim as a deduction. That can be a bank receipt, written acknowledgement from the charity, a cancelled check or a credit-card statement.

*Beware Of Pitfalls On Charitable-Deduction Tax Breaks, Andrea Coombes, 415-439-6400; Wall Street Journal, 12/10/09. AskNewswires@dowjones.com

 *Things to consider for charitable contributions, Mark Brown and Peter Tedstrom, 303-863-7231; Denver Business Journal, 12/4-10/09.