Contributing to charity is a noble way to get a deduction. And you control the timing. Sometimes, though, it’s best to put away your checkbook. You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash.
As long as you’ve owned the asset for more than one year, you get to deduct the market value on the date of the gift and you avoid forever paying capital gains tax on the appreciation that built up while you owned the asset. The charity you’re interested in helping can help you with the details.
Note this change in the rules for charitable contributions that first applies in 2007: You must have either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don’t have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit. (Before 2007, you only had to have a receipt to back up contributions of $250 or more.)
Accelerating payment of deductible expenses due in January can pull the write-offs into 2007. This could apply to an estimated state income tax bill due January 15, for example, or a property tax bill due early in the next year. Or a doctors or hospital bill. (But speeding up deductions could be a blunder if you’re subject to the Alternative Minimum Tax, as discussed below.)
Before you go into high gear racking up deductions, make sure you’ll be itemizing for 2007 rather than claiming the standard deduction. Unless the total of your qualifying expenses exceeds $5,350 if single or $10,700 if you’re married and will file a joint return, itemizing would be a mistake.
If you are on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount – because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end plans stress pushing as many deductible expenses as possible into the following fat year when they’ll have some value.
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