For most people, giving charitable donations has moved to the end of a long list of uses for their precious cash, what with the recession dragging on. Even if you are keen to support cancer research, starving children, or habitat conservation (for example), you simply may not have the excess income to help others (and gain a tax break). But if you can afford to donate (or you can't afford not to), the burning question is how much can be given and still get written off. While the majority of charitable souls donate out of the goodness of their heart, there's no reason not to accept the tax break that is part and parcel of generosity. So here are just a few things you need to know in order to make the most of donations and gifts.
To begin with, donations and gifts are viewed differently by the IRS and as a result there are different restrictions attributed to each. For example, the government seems more inclined to forgive your tax debt when you are donating to non-profit organizations than when you are contributing to your child's piggy bank. In fact, you may actually have to pay for giving gifts if you don't carefully observe limitations on value. But of course, there are ways to measure out monetary (or other) gifts so that you can take advantage of deductions rather than paying extra.
When it comes to passing on money, stocks, property, or other trackable items of value, there are two types of gifting. The first is an annual gift and as of last year the limitation was $13,000 (or $26,000 if it comes from a couple that files joint tax returns). Such gifts may be given tax free to as many people as you like (although you are limited to one such gift per year, per recipient). The second type of gift is a one-time lifetime bequest and the current limit is now $5,000,000. If this amount (or less) is given during your lifetime it is exempt from estate tax. If, however, you exceed these limits, you will be on the hook for gift tax. Keep in mind that gifts given to business partners or employees may be subject to further restrictions.
As for charitable donations, there is a lot more latitude, although you are limited to donating to organizations that are IRS-approved (look on their website for a listing if you're not certain). For example, donations made to Indianapolis garage sales to benefit your sick cousin probably won't serve as a legitimate tax deduction. That said, the IRS generally allows you to deduct for charitable donations totaling up to 50% of your adjusted gross income, and if you go over you may be able to roll deductions over into future tax years. These donations can be in the form of cash or property, but the latter must be listed at fair market value (rather than purchase value). So if you're looking for ways to put your excess income to better use than it would get in government coffers, consider how you can pass it on to friends and family or give to a worthy cause. You can't take it with you, after all, so you might as well spread the love and get a tax break.