Americans have been in a giving mood of late.
They're indulging their charitable impulses despite a slow recovery from the 2008 financial crisis and ongoing uncertainty about both potential marginal tax-rate hikes and the value of charitable deductions this year versus last.
Donations to charitable organizations were up 3.5 percent last year, to $316.2 billion, according to the Giving USA Foundation. It's worth noting that still trailed the pre-crisis peak of $344.5 billion in 2007 but the "healing continues, with the prognosis being good" for growth in giving, the foundation's chair, Gregg Carlson, said in a statement.
Most people don't make charitable donations for tax reasons alone. However, if you're going to give, you might as well give in a tax-efficient way, according to financial experts.
To that point, taxpayers who itemize deductions on their tax returns can deduct the full amount of cash contributions, up to 50 percent of their adjusted gross income (AGI). Property and capital-gains assets are also deductible, up to 30 percent and 20 percent, respectively, of AGI.
If you're planning to make charitable gifts this holiday season—the most active period of giving for Americans—advisors suggest not waiting until the last minute.
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"From now until Dec. 1, we're going through our year-end tax-planning checklist and part of that is clients' annual gifting to children and to charitable organizations," said Brent Lindell, a certified financial planner with Savant Capital Management. "Think about it in advance."
Here are five things to consider about your charitable gifts:
Know your charities. Only donations to organizations with tax-exempt 501(c)(3) status are deductible on your tax return. You can research charities at online databases that keep track of all tax-exempt organizations, such as the one maintained by the National Center for Charitable Statistics. Before giving, you should also ask any organization under consideration to verify its 501(c)(3) status.
Donor-advised funds. Donor-advised funds can help take the headache out of making individual contributions to charitable organizations. Vehicles such as the Fidelity Charitable Fund allow donors to deduct the full amount of annual contributions even if they haven't yet decided which particular charities they want to donate to. Individuals retain influence over how contributions are distributed down the road, while the funds do the due diligence on organizations.
"People don't want to have to transfer cash or assets to 10 different charities," said Joel Isaacson, founder and CEO of Joel Isaacson & Co., an independent wealth management firm. "You have to check that the funds are legitimate, but they can handle all the transactions."
"If a client has $10,000 in short-term capital gains on stock, they can deduct the full amount by giving it to charity."
Lowering the capital-gains tax bite. Taxpayers can also deduct contributions of various kinds of property. In the case of physical property worth more than $5,000, an appraisal of its value is needed to claim the deduction.
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Meanwhile, individuals who gift financial securities that have appreciated in value can avoid paying the capital-gains tax they would have owed if they had sold them.
That's especially significant for those with more than $400,000 in income; their long-term capital-gains tax rate jumps to 20 percent, up from 15 percent, this year.
This also applies to securities with short-term capital gains, of under one year, which are normally taxed at marginal income tax rates. The gifting of appreciated securities, particularly after good runs in the market like this year, can also serve to bring investment portfolios back into balance.
"If a client has $10,000 in short-term capital gains on stock, they can deduct the full amount by giving it to charity," Lindell said. "I've rebalanced accounts by doing it."
The kids are all right. A gift to your child is not exactly charity—indeed, many worry about the potential negative effects of giving cash to kids—but it can be an easy way to reduce your income and tax bite.
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Taxpayers can gift up to $14,000 annually tax-free. While recipients are liable for tax on any gifts, they are likely in a much lower tax bracket. Gifts of appreciated stock can be made, but recipients must have taxable brokerage accounts to receive the assets.
Lindell suggests parents deposit a tax-free gift of up to $5,500 directly into an individual retirement account (IRA), to get kids started on a retirement savings path.
Mind your income. A number of states progressively reduce allowable deductions, including those for charitable contributions, for people over certain income thresholds. In other words, the more you make, the less you can deduct. New York, for example, passed a budget for 2013-2014 that now limits itemized deductions to 25 percent for taxpayers with more than $10 million in income.
Those earning between $1 million and $10 million are limited to a 50 percent state-tax deduction. According to Isaacson, the charitable deduction may not be fully available to taxpayers who have experienced an unusual windfall, such as from the sale of a business, this year.
"In some cases, it may be better to make the charitable donation next year to get the full deduction," Isaacson said.
—By Andrew Osterland, Special to CNBC.com