8 tips for giving wisely
The holidays are a time of giving — to both the people and the causes you care about most. But planning how you make charitable donations can be just as important as what you give. Not only may you feel more gratified, but you could also reap some valuable tax breaks by having a well thought-out charitable and personal giving strategy.
Here are eight tips for giving more effectively.
1. Choose charities carefully
You probably have certain causes near and dear to your heart, whether related to health, arts and culture or social and economic issues. But just as important as supporting the causes you're passionate about is making sure that the nonprofits you choose use your donations effectively and efficiently.
Research charities using websites such as CharityNavigator.org and GuideStar.org. Look for those with good reputations that put at least 75% of spending toward programs and services, rather than fundraising and other overhead costs. Many worthy causes have more than one nonprofit devoted to them, so don't settle.
2. Keep organized
If you're not careful, you can end up mistakenly giving to the same charities and people multiple times a year or forget about donations that can be claimed as valuable tax deductions. Make sure to get receipts from charities for your donations and keep them in a file so they're easy to find when you complete your tax return. For gifts to loved ones, keep track of who you give money to and when so you're not needlessly triggering a requirement to file a gift tax return.
3. Consider giving appreciated assets
Many people automatically pull out their checkbook when it's time to give. While cash gifts are quick, they may not be the best option. For instance, giving appreciated stock that you've held for more than a year to charity allows you to claim a tax deduction for its value without paying the capital-gains tax that would result if you sold it and donated the cash. If the stock or another appreciated asset is donated, the charity can then sell it so all the money will go toward its mission. Giving appreciated assets to loved ones in lower tax brackets also allows them to sell the assets and pay less tax on the sale. For depreciated assets, it is generally better to sell them yourself to take the tax loss and then give away the cash. This is because you can't transfer the tax loss to another person.
4. Take advantage of gift-tax exemptions
You can give up to $13,000 each year through 2012 (spouses can collectively give $26,000) to as many individuals as you want without triggering potential gift taxes or the requirement to file a gift tax return. That's why it's often good to spread giving over multiple years rather than lumping it all into one.
If you want to give more than that, there are exceptions to consider: Gifts that go directly to educational or medical institutions to pay for tuition or health care bills are gift tax-exempt. Moreover, you can make a one-time contribution to a 529 college-savings plan for up to five times the annual gift tax exclusion ($65,000 in 2011 or 2012) without incurring a gift tax by electing to spread the contribution ratably over five years.
5. Give through life insurance
By naming a charity as beneficiary of a life insurance policy, you can make your charitable gift go further by leveraging premium dollars into a larger death benefit amount. Plus, if you retain ownership of the policy, you can change beneficiaries at any time for any reason. Even if you choose to gift full ownership to the charity so you no longer control the policy, you'll gain an income-tax deduction. Also, if you continue to pay additional premiums, you can deduct those payments from your income taxes as charitable gifts.
6. Don't forget noncash gifts
You may have a lot of stuff consuming space in your attic or closets. Giving items rather than money has benefits. For one, you're not hurting your personal cash flow by donating that old china set. However, you have to clean out your closets before Dec. 31 to claim a deduction for 2011. Remember that items need to be in good used condition or better. Also, you'll need a receipt or other reliable written document for anything valued at less than $250, a written acknowledgement with details of the donation for contributions of $250 or more and an appraisal for donated items worth more than $5,000. Check IRS Publication 526, Charitable Contributions, for the details.
Keep in mind that your time might be just as valuable as your assets: Many charities are in dire need of volunteers around the holidays as well as year-round. (If you do volunteer, keep track of your volunteer auto mileage and expenses, as those may be tax deductible, too.)
7. Seek out lifelong strategies
Ultimately, giving shouldn't just be part of your yearly financial planning. It should be part of your life plan. The reason: You can designate charitable and personal gifts before you pass away, reducing your estate tax bill.
A simple way to achieve this is designating a charity or person as beneficiary of specific accounts when permitted, such as your individual retirement account (IRA). But if you are willing and able to make a more sizeable gift, you may want to consider setting up a trust to benefit charitable or family interests. A charitable lead trust, for instance, provides income to charity today, while leaving the remainder to named beneficiaries; a charitable remainder trust pays income to you or your family for a period of years with the remaining principal going to the charities of your choice. You may also want to consider a dynasty trust to provide for future generations, for example, to pay for medical or educational costs. A "life estate" allows you to donate a home or other property to charity and continue to use it during your lifetime — thereby avoiding the hassle of having your heirs sell it.
Another longer-term option for charitable giving is using a donor-advised fund, which allows you to claim a tax deduction today for funds you contribute to a charitable investment account that you can later advise how to allocate to nonprofits. Your Ameriprise financial advisor can help you explore these opportunities.
8. Carve a total plan
Charities often bombard people with emotional appeals this time of year. If you're not careful, you could end up giving to ones that aren't reputable, and you possibly won't have enough left to give to the ones you really care about.
Work with your Ameriprise financial advisor to develop a well-rounded strategy for charitable and personal giving, including an approach that reflects your values and the kind of long-term legacy you want to leave for others. This doesn't mean you shouldn't give to the occasional door-knockers and bell-ringers — rather you should make sure you're using your charitable dollars as effectively as you can.
Giving money to the causes and people you care about most is an important and rewarding part of life. Your Ameriprise financial advisor can help you ensure that you're giving as effectively as you can.
Ameriprise Financial and its representatives do not provide tax advice. Consult with your attorney or tax advisor regarding specific tax issues.
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