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Act now on taxes to save later

By: JIM VANDER SPEK - For the North County Times | Saturday, December 15, 2007 7:55 PM PST ∞

With only 16 days left in the year, you will need to act soon if you want to cut your 2007 income tax bill.

Traditionally, this is a time for shopping but also a time when people are most charitable in their giving. Harnessing generosity to gain a tax benefit is part of an American tradition. If you have the means, you may want to consider the following charitable giving ideas:

Contribute to a charity. Your 2007 charitable contributions must be made no later than Dec. 31. Due to recent law changes, cash donations are not deductible unless you have proper written proof. For example, to get a deduction you need to leave a check in the Salvation Army kettle instead of cash. Or charge your donations to a credit card, and if it's done by Dec. 31, the deduction counts for 2007 even though you won't pay the bill until 2008.

Contribute used items to a charity. Junk doesn't work. Donations of items such as clothing and furniture are no longer deductible unless they are in "good" condition. Nevertheless, it still makes sense to clean out your closets and snag a deduction for "good" stuff. Best of all, you get to decide the fair market value in most cases. Unfortunately, donating vehicles to charity has become somewhat problematical. Your deduction is limited to what the charity realizes on the eventual sale.

Contribute appreciated property. The benefit here is that you will be able to claim a charitable deduction for the fair market value of your gift, even though you have not paid any tax on the capital appreciation. Stocks, mutual funds and other securities could be good candidates for a last minute gift since they are fairly easy to transfer and value. If you are more well-to-do, you may want to consider giving appreciated real estate. Be sure to be clear as to the tax issues if there is any debt owing on the property.

Donate directly from your IRA. If you are at least 70 1/2 years of age, you can donate up to $100,000 from your IRA directly to charity income-tax-free for 2007. It can even count against your minimum required distribution. That's likely better than taking a taxable distribution and then making a contribution. Here's why. First off, it keeps your income down, which could be important if you want to keep your Social Security income tax free. Also, you won't need to start itemizing if, like many seniors, you normally take a standard deduction.

Set up a "donor-advised" fund. This is especially useful at the end of the year, since you do not need to decide immediately which charity or charities eventually receive the money. The donations are given irrevocably and stay in trust until you decide how you want to have them distributed. The big advantage is that you obtain an immediate deduction when you deposit the funds. Also, they give you the option of donating anonymously.

Create a "Charitable Unitrust" or "Charitable Annuity Trust." These specially designed tax-planning instruments are great for unloading appreciated real estate or a business while still retaining a flow of income for the rest of your life. This allows you to sidestep the capital gains tax of a sale.

Sizable deductions can be tailored out of this, depending on how much you need in the way of ongoing income. Although it is late in the year, I am sure that a planned-giving specialist at your favorite charity would love to explain this and run the numbers for you. With some quick action, you may even get this up and running before the end of the year.

There is one kind of giving that cannot buy you any income tax benefit. Every year, people hear that they can give money to individuals "tax-free." Unfortunately, this does not mean the same as getting a deduction on your taxes. Instead, such gifts are free of any "gift tax."

The gift tax rules are somewhat obscure with the actual tax kicking in once you give away over $1 million during your lifetime. Any part of this million dollar exclusion that is used up will also reduce the amount that can be excluded from your estate tax for death tax purposes. However, gifts to any single individual of $12,000 in 2007 and 2008 do not need to be reported. This is calculated on an individual basis, which means a couple can give double this amount. Once you give more than the annual exclusion amount in a single year, you'll have some planning concerns and a reporting obligation, but not generally a tax liability.

There is a loophole in this law. In addition to the $12,000, you can also exclude any amounts paid directly to medical providers for medical care or directly to schools for tuition.

Jim Vander Spek, CPA Vander Spek & Corsello, CPAs A Professional Corporation 350 West Fifth Avenue, Suite 300 Escondido, CA 92025. Call: (760) 741-2659; fax: (760) 743-7428; Web site: http://www.VanderSpekCPAs.COM