New laws benefit charitable donors
It may be one of the great ironies of our tax laws that the holiday season for giving is also the season for preparing materials for your income tax return.
You may be in the throes of shopping and wrapping for the holidays, but don't forget that the tax year ends on Dec. 31. If you want to make some donations to charity that may benefit you on your 2006 taxes, you must make those donations before ringing in the New Year.
New for 2006
This year it is particularly easy to benefit your favorite charity and perhaps your own tax situation. That's because taxpayers can take advantage of two new laws designed to benefit those who want to make contributions of stock from their individual retirement accounts. The first is a new charitable tax break for retirees in the new Pension Protection Act. If you are 70 or older, you can make tax-free distributions of up to $100,000 a year from an IRA to a charity.
The law states that any IRA distribution sent directly to a charity will not be included in your taxable income-thus reducing your taxable income. This is a benefit to the individual who does not itemize deductions.
However, if you reduce your yearly income by the amount of the charitable donation, you cannot also deduct the donation as a charitable gift.
The second change allows you to donate appreciated assets such as stock to a qualified charity. In that case, you can deduct the full value of the security at the time of donation. In this way, you can avoid selling the security and incurring a capital gains tax. For example, say you had shares of stock in the Acme Co. that you bought for $10 a share. The stock is now worth $15 a share. You can donate the stock at the higher price of $15 per share.
The charity will benefit by obtaining the full value of the stock. And you can deduct the value of the stock up to 30 percent of your adjusted gross income.
Your portfolio might also benefit from this tax provision if it enables you to remove a stock that you have long-wanted to sell, but on which you did not want to pay capital gains taxes.
No matter the size of your contribution, if you regularly give to charity, keep your receipts. These donations can only be deducted if you itemize your taxes.
Also, if you are donating clothing or other items, new rules call for an appraisal of items worth $500 or more. Previously, appraisals were only required for items worth $5,000 and up.
Tax credits to study
If, during 2006, you have installed qualified home improvements-such as energy efficient windows or doors-you may qualify for an energy tax credit. And if you bought a hybrid truck or car you may be able to obtain a tax credit on that purchase as well.
The lists of qualifying purchases are available from the Internal Revenue Service (www.irs.gov) or from your tax adviser.
Where to start
If you are still considering whether to give, you should first estimate what your gross income will be in 2006. Then decide what if anything you would like to give to charity and the charity you most prefer.
Second, determine whether you will be experiencing any major changes in your lifestyle that would require a significant alteration in your financial planning such as the birth of a child, a marriage or starting your own business. If you are retired, consider whether this is the year you may want to move to a retirement community or whether the health of you or your spouse will require a nursing home.
If you have any questions or concerns, be certain to sit down with a qualified tax adviser who can give you insight on what the law allows and what might be most beneficial to you in the long run.
So don't forget to set some time aside this holiday season to make certain you are ending the year on a wise financial note. Not only may your taxes reflect your careful planning, but your favorite charity may also benefit.
Wendy Steele is the Senior Vice President of Private Banking for the Traverse City office of Huntington Bank. BN