Words by: Bryon Gragg
Published November/December 2010
At this time of year, our thoughts turn to holiday traditions of family, food, events and gatherings, plus the hustle and bustle that comes along with them. During this period, some people may take the time to reflect on the year as it quickly slips away. In reality, we all should. While we at Gragg & Gragg believe tax planning should take place throughout the year, now is the time to really take stock of your tax situation before it is too late.
As I prepare this article for publication, there is a significant amount of uncertainty swirling around all types of taxes. I don’t expect this uncertainty to disappear prior to the elections in November and, quite possibly, not even before year end. However, there are a few tried-and-true charitable strategies that can help reduce the income tax bite as you file your return in the spring of 2011.
During the last few weeks approaching the end of the year and especially during the Christmas season, many people’s thoughts turn to charity, and for all the right reasons. But your charity can also benefit you financially, in addition to the emotional satisfaction it can bring.
For instance, if you have appreciated assets such as stock, it may be more beneficial to gift the stock to a charitable organization as opposed to selling it, paying the capital gains tax and then giving the remainder to an organization. In this situation, you receive a deduction for the fair market value of the stock gifted to the charitable organization.
Here’s an example: Assume you purchased 100 shares of stock in XYZ Corporation for $25 a share in 2006. In 2010, the stock is now valued at $100 per share and has a total value of $10,000. If you sell the stock, you have a gain of $7,500 and would owe income tax on that amount. Assume that instead of selling the stock that you gifted it to your favorite charity. The charity receives the stock as its $10,000 value and is free to convert it to cash at that point. You get to take a deduction for $10,000 and avoid the capital gains tax. The charity is happy, you are happy and your Uncle Sam is, well…not as happy as he doesn’t get to touch any of that $7,500 gain of yours.
Another charitable deduction can be achieved by donating clothing, furniture or other assets to a charitable organization. Donations of clothing and household items should be in “good used condition or better.” You will receive a deduction based on the fair market value of such items; generally this is what you would be willing to pay at a thrift store or yard sale. Be sure to keep your receipts and detailed listings of items you donate. One source for guidelines that detail estimated values to assist in determining your deduction can be found at www.salvationarmyusa.org. A Google search or your tax accountant may also have a schedule.
An often overlooked deduction is mileage you incur while performing volunteer duties. In 2010 you are allowed a deduction of 14 cents per mile when you drive in service of a charitable organization. For example, if you volunteer time with the Boy Scouts or Girl Scouts and use your vehicle taking them on outings or to camp, that mileage is deductible. Many other organizations such as Hospice or Meals on Wheels have the opportunity for volunteers to drive a number of miles. If you’re involved with organizations that require travel, even if it does not seem to be a lot, make sure you keep a log of the number of miles driven along with the date and purpose.
Just for clarification, contributions made to individuals, political organizations or candidates and raffles are not tax-deductible. Also, while volunteers provide substantial benefit to charitable organizations, time and services rendered do not qualify for deductions.
Most charitable contributions are driven from an individual’s desire to help his fellow man and not necessarily for a tax deduction. However since the deduction is available, it makes sense to make most of it. Plus, you get the incalculable gift of knowing you are helping others in this season when we try to show good will toward fellow man.