Gifts that keep giving: plan gifts and donations for the coming year that will lower your tax liability.

Plan gifts and donations for the coming year that will lower your tax liability

BY NOW, YOU'VE PROBABLY FINISHED your last-minute shopping and bargain hunting for this season of gift giving. But it's still not too late to select gifts that can ensure a return on your investment. Why not make contributions to qualified charitable organizations and write off the donations on this year's tax returns?

Too few taxpayers take advantage of this "gift" from the Internal Revenue Service. In the 1993 tax year, taxpayers contributed $103 billion to qualified charitable organizations, yet only $67 billion of that was claimed. Kevin Coleman, a certified public accountant in Culver City, Calif., says many people lose out on these deductions because they don't keep accurate records, or they're simply unaware that such donations can be deducted for tax credit.

There's still time to plan a gift-giving strategy that will help minimize your tax liability. Before you begin mapping out your strategy, make sure the recipients of your gifts have current nonprofit status. Simply ask the association directly and review a copy of their 501(C3) documents--government certification of their charitable status. The IRS also publishes a list of qualified organizations.

Be aware that the IRS limits the annual amount each taxpayer can write off in charitable deductions. If you've already exceeded that amount-50% of your adjusted gross income--the balance can be carried forward to the next tax year. Anthony Elliott, a certified public accountant based in Simi Valley, Calif., says that ideally you should map out a strategy with a professional. Nonetheless, here are some gift-giving ideas you can implement on your own that could lower your debt to Uncle Sam.

* The gift of time. You may have already planned on volunteering some of your time at homeless shelters or soup kitchens. Keep records of your out-of-pocket expenses. Money spent on uniforms and unreimbursed car outlays, at a standard rate of 12 cents per mile, qualify as legitimate write-offs.

* Yard sales. This may be a good time to clean out your closets, garage and basement. Rather than throw out that too-small skirt or the recliner that doesn't match the sofa, donate those items to charitable organizations.

Of course, written records from the receiving organizations are vital. New laws passed last year require organizations to issue receipts for cash and noncash donations valued at $250 or more. Such receipts should list the items donated and their current market value. it may be up to you to get the value of such goods determined.

* A stock answer. Few people take advantage of donating appreciated capital gains type properties, such as stocks and bonds. Most people just sell the properties and then donate the cash. If done that way, the donor ends up paying capital gains taxes; a better way is to donate the stock directly. A direct donation allows you to give more to the charity, since the 28% capital gains tax isn't levied, and write off a larger amount.

Appreciated capital gains type properties must be held for a year before being donated.

* The gift of cash. If the requisite paperwork and record keeping needed to satisfy the IRS seems daunting, you can always contribute cash, which doesn't require appraisals or additional documentation. Keep in mind, though, that your canceled check is no longer proof of your contribution. A receipt from the charitable organization is also needed for donations of more than $250.

Coleman suggests that even the cash-strapped can make such contributions with borrowed funds. You can charge your credit card on December 31 and still take the deduction, regardless of when the loan is repaid. Of course, if the loan is not immediately repaid, the benefit of borrowing to make cash contributions may be outweighed by your credit card interest rates.

* The corporate way. Some people can make contributions through their employers. Many firms will match donations to charitable organizations; check with your employer.

Also, if you're a highly paid executive with a hefty group life insurance policy, you may want to donate a portion of it to a charitable organization, says lan Quan-Soon, president of the New York City-based IQ Financial Services, The premium your employer pays on group life insurance for policies that exceed $50,000 is considered income to you. For example, if you have a 100,000 group life insurance policy, the amount that your employer pays in premiums for only $50,000 of that policy is subject to FICA and income taxes. To avoid having to pay income taxes on the amount spent for the excess $50,000, list a charity along with your family members as a partial or full beneficiary.

PLANNING IS THE KEY

"Don't just look at income tax. Look at estate taxes as well," says Nahum Daniels, certified financial planner and president of Daniels Capital Strategies Limited in New York. "When you die, the government taxes everything." On the federal level, estates are taxed at a maximum of 55%, and some states add an additional 5% tax. Federal taxes apply only to estates valued at more than $600,000.

One way to reduce estate taxes and income taxes simultaneously is to set up a charitable remainder trust. The assets in the charitable remainder trust transfer to the charity when you die. But for the rest of your life, the interest the trust earns is paid to you.

For example, if you deposit 100,000 to a charity trust and the gift is invested and earns 10% interest annually, the interest is paid to you, says Quan-soon. You can take a deduction on the $100,000, even though the gift does not transfer to the charity until after your death. At the same time, you will have reduced the total assets in your estate that will be taxed upon your death. Daniels notes that such trusts require extensive planning and are best suited for wealthier individuals.

It's a good idea to map out a strategy now so that you can balance your gift-giving throughout the year. "As a family unit, my wife, son and I have discussed what organizations we want to regularly make contributions to," Elliott says. Likewise, it's a good idea for you and your family to identify early in the year the groups that address social causes or issues dear to you. Then plan ahead and space contributions throughout the year.

Also, consider making periodic payments through automatic payroll deductions. Certain organizations, such as United Way, allow that.

As a business owner, Elliott has found a way to incorporate his gift-giving strategy into his business relationships. He often thanks clients who provide new business referrals by making a charitable contribution in their name. "It's important to give the person who made the referral some recognition and at the same time give to a worthy cause," Elliott says.

Finally, when planning your contributions, you also need to project your taxable income for the coming year. It may be more advantageous to make the contribution in a year in which you will be in a higher tax bracket, Coleman says. The key, in any case, is planning ahead so that your contributions also help fight your tax battle.