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GIVING BIG? DON'T DAWDLE

December 12, 2005

While December 31 is the deadline for making deductible charitable contributions for this year, folks who have big plans for their 2005 deduction should get busy now.

APPRECIATED PROPERTY GIFTS

Charitable gifts of appreciated property are tax-efficient. If the property has been held for over one year you can deduct the full value of the donated property, while never paying tax on the gain.

This benefit has some restrictions. If the donation exceeds $500, you must separately disclose the gift. A qualified appraisal is mandatory for gifts over $5,000, except for gifts of publicly-traded property.

While Big charities usually can handle gifts of stock quickly, they may not be able to quickly process a gift of, say, real estate or artwork. Small charities sometimes are baffled by a gift of stock. It can be very frustrating when a deduction gets pushed back a year because because the donation paperwork isn't processed before year-end, so you need to allow the charity plenty of time.

Remember also that gifts of appreciated property to public charities are subject to a limit of 30% of adjusted gross income; such gifts to private foundations are subject to a 20% limit.

BIG IRA GIFTS

The tax law has a one-time special on cash gifts this year. While normally cash gifts are deductible to the extent of 50% of AGI, the limit for this year was raised to 100% of AGI in the Katrina relief legislation.

Some taxpayers are using this rule to donate IRA balances to charity. Many taxpayer have IRA balances that are well in excess of their other income. The 100% of AGI limit allows taxpayers to withdraw their IRA balances, donate the entire proceeds to charity, and get a full current tax deduction.

This paperwork usually can be processed quickly, but not instantly. If you are serious about doing this, you should be starting the paperwork. Before pulling the trigger, though, keep in mind:

1. If you withdraw the IRA balance on or before age 59 1/2, you will have a 10% penalty, even if you donate it all to charity.

2. Congress is considering legislation that would let you donate IRA balances directly without withdrawing the money. Unfortunately, the final legislation may not be completed by year end, so we may not know this year whether this provision will be enacted at all.

This post is third in a series on 2005 year-end tax planning.

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