It's certainly the season for giving - and when you make charitable gifts, you can both give and receive.
To get the most out of your gifts, your first step is to make sure you are giving to a worthy charity. That means you'll need to ask some questions. How does a group measure its effectiveness? And does it use its money wisely? Is it devoting as much of its contributions as possible to the actual work of the organization, or is it spending too much money on administrative costs? Generally, a worthwhile charity should spend at least 75 percent of its income on charitable programs.
You may be able to find this type of information in a charitable group's annual report and on its website. But if you want to dig deeper and get information from an independent source, you may want to go to the website of one of the agencies that evaluates charitable groups. On these sites, you can get a lot of information dealing with a charity's effectiveness, income, spending, mission, governance, transparency, executive salaries and other topics.
Once you've chosen a charity, or charities, you can decide how much you want to give. And your generosity will be rewarded, because your gift to a qualified charitable organization may entitle you to a deduction against your income tax, as long as you itemize deductions. A "qualified" charitable group is one that the government has classified as a tax-exempt organization. Ask your intended charity for information on its tax status. Reputable nonprofits will be more than happy to offer proof.
But what if you'd rather not simply give cash to the charitable group? What if you've owned some stocks for several years and the stocks no longer fit your investment needs? Should you sell the stocks and then donate the proceeds to the charitable group?
You could - but you'll likely be better off, from a tax standpoint, by simply donating the appreciated stocks. If you were to sell these stocks, you'd have to pay capital gains taxes. Consequently, your gift to a charity would end up costing you more than just the loss of the asset.
But if you directly donate the appreciated stocks to the charity, you'll get an immediate tax deduction, which is normally worth the property's fair market value. And, perhaps even more importantly, you'll avoid any capital gains taxes on the donated stocks' appreciation. If you've held the stocks for a long time, and they've increased in value substantially, these capital gains taxes could be significant.
Once you've donated the appreciated stocks to the charity, it can decide whether to hold them for a while or sell them immediately. In either case, though, you'll have no capital gains tax obligation.
However you choose to make your gift, be sure to document it. Typically, no deduction is allowed for a contribution of $250 or more unless you have a written confirmation from the charity. Consult with your tax adviser on the specifics of the deductibility of your gifts.
Finally, whether you give cash or appreciated assets, you'll need to make your gift by Dec. 31 if you're going to deduct it on your 2015 taxes.
Charitable giving can benefit everyone. Your gift can help a group whose work you support, while at the same time providing you with potential tax advantages. That's a win-win situation.
Edward Jones, its employees and financial advisers are not estate planners and cannot provide tax or legal advice. Individuals should consult a tax professional regarding their specific situation.