For most people, giving to charity is simply a matter of goodwill and generosity. But there are tax benefits, and they can be significant. Knowing how to get a tax deduction can allow you to give even more.
But you've got to follow the rules. And as with so many tax matters, common sense is not good enough.
There are a few tricks, too, like avoiding capital gains tax on investments by giving stocks or other assets that have grown in value. That one may be particularly valuable this time around, because many investors are sitting on big gains from recent years.
"The more appreciation the stock or other asset has, the greater the potential tax benefit may be," said Grant A. Webster, senior wealth manager at AKT Wealth Advisors in San Diego.
Before making donations, be sure the charities you choose qualify for tax-exempt deductions. Use the IRS Select Check tool, and note that churches, synagogues, temples, mosques and government agencies are eligible for tax-deductible donations, even if not in the Select Check database.
Donations are tax deductible in the year they are made — by the end of Dec. 31 for 2015, for instance. If you put a contribution on a credit card by the end of the year and don't pay the bill until 2016, it's still deductible in 2015. The same goes for a check you write this year that is not cashed until next year.
The first issue: Do you claim itemized deductions on your tax return? To claim charitable deductions, you must. That's not such a simple matter, because itemizing pays off only if all of the itemized deductions, which include things like mortgage interest, real estate taxes and some medical expenses, add up to more than the standard deduction available to people who do not itemize. For 2015, standard deductions are $6,300 for individuals and $12,600 for couples filing a joint return.
The problem is that because financial statements and other tax-filing forms are not available until after the first of the year, you cannot fill out your tax return before the Dec. 31 deadline for making charitable contributions for 2015, so knowing whether you will itemize or take the standard deduction is a bit of a guess. Your 2014 return can serve as a guide, assuming your financial situation has not changed significantly. Charitable deductions are reported on Form 1040 Schedule A.
Taxpayers with lots of deductions can face deduction limits, but the restrictions are fairly small and do not kick in until incomes are fairly high: $258,250 for individuals, $309,900 for married couples filing jointly.
If you do choose to itemize, you must have records to support your gifts. It used to be you just put down a value for each gift and that was it. Now every item worth more than $250 requires a written acknowledgement from the charity that describes the gift and its value, whether it's cash or items such as clothes or a vehicle. For a monetary gift, it's best to have a record from your bank as well, such as a statement or canceled check.
If you donate a car or truck, you can deduct only the amount the charity gets when it sells the vehicle, and that could be less than the Blue Book value you expect. The charity should send you a notification after the vehicle is sold.
"For assets other than cash, like cars, boats, houses, land, antiques, paintings, manuscripts, etc., the documentation becomes much more complicated, with many of these items requiring a certified appraisal," said Brent D. Dickerson, a certified financial planner with Trinity Wealth Management in Lubbock, Texas. "So giving things other than cash should always come with the caveat that the donor should contact their accountant, attorney or financial advisor."
As mentioned above, this may a good year to donate appreciated assets, which can be anything from stocks and mutual funds to a home or work of art.
"With the recent bull market, many folks have stocks that have appreciated significantly in value," noted Webster. "If you have charitable intentions, gifting shares of highly appreciated stock can be beneficial."
Imagine you had 100 shares of a stock that had doubled from $50 a share to $100. If you sold all 100 shares, you'd realize $10,000 but might be left with only $8,500 to give to charity after paying a 15 percent long-term capital gains tax. By giving the shares themselves rather than selling, you pass the whole $10,000 to the charity and get to take a deduction on the full $10,000 as well. The charity pays no capital gains tax when it sells the shares. (With a money-losing investment, incidentally, it may be best to do the opposite: Sell it so you can claim a tax loss, and then give the proceeds to charity and claim a charitable deduction.)
Investors thinking of donating mutual fund shares should consider doing so fairly soon, said Andrew M. Aran, a partner with Regency Wealth Management in Ramsey, New Jersey. The goal, he said, is to donate the shares before the fund company makes its annual capital gains distribution, a taxable payout of profits on holdings the fund managers sold during the year. These distributions are usually between late November and the end of the year.
Your broker or mutual fund company will know how to make an asset donation, since few investors these days have old-fashioned paper stock certificates. Note that the transfer to the charity must be complete in the calendar year and the process can take several weeks, so don't delay.
In past years, investors could contribute IRA assets to charity and avoid tax on IRA withdrawals, but that rule has expired. Last year, Congress reinstated it in December for the 2014 tax year, but there's no guarantee that will happen this year.
— By Jeff Brown, special to CNBC.com