So, it’s Christmas Day, and for Christians, we gather on this special day with our families and friends and to celebrate of the birth of Jesus. In the middle of our special celebration, however, many of us find ourselves caught up in the annual ritual of buying expensive gifts for one another. Isn’t it ironic that Christ, whose birth we celebrate today, deliberately lived a life of poverty to teach us by example that we should minimize the importance of earthly things and should instead focus on the importance of spiritual things? Scripture informs us that even the modest gifts that Jesus and His disciples received from followers were often given away to the poor.
Today, I want to remind readers that Christmas is a great time to re-focus our attention on the needs of the less fortunate. And our Federal tax laws actually encourage giving to those in need, and that’s what I want you to discuss with you today. Federal law encourages giving to approved charities that serve a public interest; however, you must exercise caution because the IRS carefully scrutinizes these gifts to make sure they are properly substantiated.
Here are some rules you need to know about if you are interested in making gifts at the end of this year:
- For contributions of less than $250, the IRS requires we keep a record of the name of the charity, the date of contribution, and the amount given. The best evidence would be a check, credit card or receipt from the charity.
- For cash or property donations of $250 or more, the IRS requires a contemporaneous written acknowledgment from the charity. This means that before you file your return, you must get a receipt from the charity describing what was given, when, the amount of cash or value of the property, and whether you received anything in return.
- For gifts of property worth more than $5,000, the donor must obtain an appraisal by qualified appraiser that is meets certain IRS standards. A summary of that appraisal must be attached to our return for the year we claim the deduction. Interestingly, the charity is also required to provide the IRS certain information in its tax returns.
There are a couple of pitfalls to watch out for on gifts greater than $5,000. The IRS requires you to treat the gift of similar items of property as a single gift for purposes of this substantiation rule. So, for example, if you give artwork to three different colleges, the IRS treats it as a single gift for purpose of the appraisal rules. Another pitfall—gifts of services performed for a charity are not deductible, though gifts of expenses incurred in providing services to a charity (as travel, meals, etc.) are deductible.
- One of the most successful ways to give substantial sums to charity is through use of a “private foundation”. If you intend to make a significant contribution, or perhaps make large gifts over many years, you can create your own foundation. This allows you a current deduction but it also allows within certain guidelines to keep control of the property being given away and may even allow you to keep the right to income from the property. The use of private foundations also allows you to exclude the property from your estate. This is a very sound, well accepted way to give our property away without a lot of financial hardship. This is a specialty area of the law and requires that you get a qualified advisor to assist you in establishing a private foundation.
- Finally, the tax law may permit you to transfer money from your IRA to charity without your being taxed. This is also a great planning tool, but the rules are complicated and you must secure the services of a competent advisor to assist you.
So, folks, if you feel inclined to make year-end gifts, these are some of the tax rules you need to consider. Warm wishes for all the rich blessings of the Christmas season to you, your families and friends.