End of Year Tax Tips for the Generous

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance, Mary Beth Franklin, Senior Editor,

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The end of the year usually marks a surge in giving. When it comes to benificence for family, friends or charities, keep in mind the tax rules that will help both you and your lucky recipient.

If you are able to open your heart and wallet this year, be sure you make the most of your gift by getting a receipt for every donation. And remember, to claim a charitable contribution on your 2010 tax return, you must itemize your deductions, and you must make your contributions by December 31. If you pledged $500 in September but paid the charity only $200 by December 31, for example, your 2010 deduction would be $200. Learn more: Tax Breaks for the Generous .

Give Securities Not Cash

'Tis the season to share your bounty with the less fortunate or to support your favorite cause. If you're in a charitable mood, consider donating appreciated securities -- stocks or mutual funds -- instead of cash. When you give $1,000 in cash, you get to deduct $1,000, and that saves you $250 in the 25% bracket. (Any state-income-tax savings are gravy.)

But let's say you have $1,000 worth of mutual fund shares that you bought more than a year ago for $500. If you sell the shares, you'll owe $75 in tax on the profit, even at the preferential 15% capital-gains rate. But if you donate the shares, the charity gets the full $1,000 (it doesn't have to pay tax on the profit when it sells), you avoid the $75 tax bill, and you still get to deduct the full grand. It's a win-win-win situation. Learn more: Charities: Give Stocks Instead .

With the future of the estate tax in flux, now's the time to take full advantage of your annual gift-tax exclusion -- because once the year is over, your 2010 exclusion is gone forever.

You don't get an income-tax deduction for such gifts, but there's an important advantage: Assets given away during your life -- and any future appreciation -- won't be included in your estate to be taxed after you die. And while there is no estate tax in effect for 2010 -- Congress allowed it to lapse for one year -- it will come roaring back in 2011.

Without further congressional action, the estate-tax exemption will revert to $1 million next year -- the lowest level in a decade -- and the maximum estate-tax rate will rise to 55%. Before the estate tax was repealed for 2010, the exemption was $3.5 million in 2009, and the top rate was 45%. Republicans, who now control the House and picked up additional seats in the Senate in the recent midterm elections, want to boost the estate-tax exemption to $5 million and reduce the maximum tax rate to 35%. But until lawmakers act, the $1-million exclusion level stands -- making it increasingly important for upper-income Americans to take advantage of gifting strategies to reduce their taxable estates.

Learn more: The Gift Tax: Use It or Lose It .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance Taxes
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