Safe and Smart

Finacially Sound

by Annika Ferris, CFP®, CLU®

February 28, 2008

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According to the Giving USA 2007 report, Americans recently reached a record high in charitable giving with approximately $295 billion going to charity in 2006. In addition to meeting the critical needs of others and giving back to society, tax benefits for the donor can be another big incentive. Recent tax law changes have altered the charitable giving landscape by raising the standards on what can be deducted and strengthening documentation requirements. Individuals who make charitable gifts should be aware of these changes and consider giving strategies that both maximize donations and ease the compliance burden.Here are some of the changes:

Clothing and household items

Have you ever cleaned out your attic or basement, dropped off your old clothing and household items at Goodwill, and claimed a small tax deduction? This may not work on your 2007 tax return. The IRS is no longer allowing tax deductions for these items unless they are in "good used condition or better." Don't be surprised if deductions for items valued at "minimal monetary amounts" get denied. Deductions for items worth $250 or more still require a "contemporaneous, written acknowledgement" of the donation from the charity that should be maintained in the taxpayer's file for backup. To claim a deduction of $500 or more for any one item, regardless of its condition, you now must attach a qualified appraisal to your tax return. There is also a special set of rules that applies to contributions of cars, boats and other items (such as antiques, art, jewelry, etc.) valued at more than $5,000.

Cash
Requirements for cash gifts are also being tightened. You can no longer place a $50 bill in the UNICEF donation box and take a tax deduction. The new tax laws require that all cash gifts be documented by either a bank record (such as canceled checks, bank statements or credit card statements) or written communication from the charity. Existing laws still require a substantiation letter for cash gifts made of $250 or more. If you make a donation via payroll deduction, the IRS is now requiring you to keep a copy of your pay stub as well as a pledge card.

Appreciated stocks/mutual fund shares

The IRS continues to require a substantiation letter documenting  stock transfers to charity. Some individuals use highly appreciated stocks or mutual fund shares (that have been held more than one year) to make donations by directly transferring them to the charity. This is a win-win situation because the donor avoids capital gains taxes while receiving a tax deduction for the full market value of the shares; because the charity is tax-exempt, it receives the full number of shares and can sell them with no tax effect.

Donor-Advised funds –
A strategy for flexible giving

While all of the rules surrounding the required documentation for charitable gifts may seem daunting, don’t let them discourage your giving! One strategy that might help you avoid these headaches is a Donor-Advised Fund. A DAF is essentially a brokerage account for charitable giving that is set up to receive cash or investment assets that will eventually be given to a charitable organization. These accounts are easy to set up and are offered at many of the large brokerage firms, local community foundations and some religious foundations. The process of using a DAF is simple: The donor makes a contribution of cash or appreciated stock/mutual funds to the DAF and receives a full market
value tax deduction for the contribution in the current tax year. The DAF sends the donor a substantiation letter documenting the contribution. If stock or mutual funds shares are contributed, the
appreciated shares can then be sold without capital gains tax, and the full proceeds are available for giving in the DAF. If the donor plans to give the assets over a period of many years, the assets can be invested. (Various pre-defined portfolio mixes are offered by the custodian of the DAF.) The donor then recommends grants at his or her discretion to qualified charities, including churches or educational institutions. The grants are easily made online
or via fax, and automatic recurring gifts can be set up if desired. The custodian of the account takes care of transferring the funds to the designated charity in the donor’s name.

When to consider a DAF

Using a DAF allows for a great deal of flexibility and may be a smart strategy to consider in many situations. First, if you have a high-income year and are looking to reduce your taxes, you can make a contribution equal to several years of gifting
and get the full deduction, thus reducing your taxes in the highincome year. Second, if you have a concentrated, highly appreciated stock
position you are looking to diversify out of without paying capital gains tax, the DAF can sell the stock without paying tax, and you can use the proceeds for giving over many years. Last, but not least, if you make a large number of donations to charity, you only have to keep track of one substantiation letter with a DAF. While this strategy may be a slam-dunk for many individuals, take caution – contributions to these accounts are irrevocable, and once in the account, the funds can only be used to make grants to qualified charities. Be sure to discuss these strategies with your financial and tax advisors before moving forward to make sure that this strategy is appropriate for your overall financial situation.

Annika Ferris, CFP®, CLU®, is a wealth advisor at Brightworth, an Atlanta-based and nationally recognized independent, fee-only private wealth counsel firm that serves high net  worth families and individuals.