Gifting has long been a strategy to reduce estate taxes by giving away assets to your heirs before you die, saving up to 55% in federal estate taxes alone. The rule is that you can gift up to $10,000 to an individual each year without reducing your estate tax credit. Here is a way that you can use gifting to also save on family income taxes.

Let's say you and your spouse are in the 28% tax bracket with a joint income of $85,000. You have a daughter, a sophomore, in a college work-study program and she earned $10,000 for the year. It's time to pay your daughter's tuition and you plan to sell $10,000 of stock to generate funds to make the payment. Let's assume that you bought the stock 10 years ago for $2,000, which would give you a capital gain of $8,000. At your capital gains tax rate of 20%, you would owe $1,600 in taxes on the sale of this stock. However, if you gift the $10,000 worth of stock to your daughter, her capital gains tax rate is only 10% so her tax on the stock sale would be only $800. Your Net Family Tax Savings = $800. Note: Beginning January 1, 2001, a new capital gains rate becomes effective and your daughter's capital gains rate will drop from 10% to 8% which would give you an additional $160 in family tax savings. Bonus savings! Since you and your spouse's joint income exceeds the income limit for taking the Hope or Lifetime education credits, you could let your daughter claim herself as a dependent so she would be eligible to take the Hope Credit of $1,500. The Hope Credit would be enough to offset the entire $800 of her capital gains tax and it would eliminate the tax on her $10,000 in earnings. The downside is that you would lose the $784 federal tax benefit by not claiming your daughter as your dependent.
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Most people remember to deduct the cash given as charitable contributions. But non-cash contributions to charitable organizations are also deductible, and can be an important part of your tax savings strategy.

With regard to any charitable contribution where an itemized tax deduction is desired, there are two very general requirements that must be met. First, the recipient of the charitable contribution must be a qualifying charitable organization. And second, to take a current itemized tax deduction, the contribution must fall within certain limitations based upon your adjusted gross income (AGI). If the charitable contribution exceeds the amount that is allowed as a deduction in the current year, such excess may be carried forward for a period of five years until fully utilized.

In addition to these limitations, depending on the type of charitable contribution given and the qualifying organization it is given to, there are several specific rules that also must be followed to determine the amount of the charitable contribution deduction you can take. For example, the most common charitable contribution is to a qualifying "public charity," which is usually limited to 50% of AGI.
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As we go into the last quarter of the year 2000, from an income tax planning/ savings perspective, I recommend that those of us who have some extra "stuff " consider taking a good look at this "stuff" and perhaps put it to good charitable use before the end of the year. You can do this by searching the house, basement, attic, yard and the garage for "stuff " which still has utility or still in OK condition, even if not in the best of condition. This can be clothes, furniture, books, records (they use to exist at one time), cd's, computers, monitors, tv's, radios, toys, old tools, kitchen appliances/supplies etc. and even an auto; e.g.,check with organizations such as the American Lung Assoc. and Heritage for the Blind regarding acceptance of auto (used) donations. (note well, that currently, valuations of such auto donations are a hot audit topic with the IRS) Believe it or not, there are many people who do shop at places such as the Salvation Army or Goodwill stores, thrift shops etc., and are happy to purchase things that have been donated by those of us who can afford to give the "stuff " away.

The point is, that by donating, to a qualified charity, noncash property which has depreciated in value, i.e., non- appreciating property, (donating appreciated property is another subject for next time) individuals can reduce their income taxes if itemizing tax deductions. Such a property donation ( aka "an in kind " donation) generally qualifies as tax deductible provided you fairly value the property by some objective measure, which could be a comparable sales value at a Salvation army or Goodwill thrift shop or flea markets etc. If you donate property it's always best to obtain a stamped receipt from the charity describing the property, its value, (which is valued by you or sometimes the charity) and the date of donation. The value is relatively easy to measure but it's important, in the event of an IRS audit, to show a reasonable or fair value instead of an inflated or "trumped up" value based on nothing even close to the real world value. The deductible value of non-appreciated property value can never exceed its original cost.
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