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Tax benefits of charitable contributions
By making charitable contributions, you can gain these tax benefits:
• Take an immediate tax deduction. If you itemize your taxes, you can deduct your contributions to charitable organizations, as long as they are “tax qualified.” Your tax deductions for charitable contributions are generally limited to 50 percent of your adjusted gross income. If you want to claim a deduction for the 2009 tax year, you’ll need to make your contribution before Jan. 1.
• Avoid capital gains taxes. If you want to support a charitable group, you’re not limited to making cash contributions — you can also donate other assets, such as stocks or real estate. If you’ve held these assets for a long time, their value may have risen considerably, despite the volatility of the financial and real estate markets the past couple of years. If they have appreciated, and you wanted to sell then, you’d have to pay capital gains taxes on your profits. But if you donate these assets, you can avoid the capital gains liability while still claiming the tax deduction.
• Remove assets from your taxable estate. In 2010, the estate tax is repealed, but it will be back in 2011. Estate taxes can be heavy, and if your heirs aren’t prepared for them, they may have to sell assets to pay them. To possibly help avoid this problem, you may want to reduce the value of your taxable estate. One way of doing this — and of also receiving an immediate income tax deduction — is to donate assets, such as investments and property, to a charitable group. If you want to still enjoy the benefits of these assets while you’re alive, you could transfer them to a charitable remainder trust, which can then sell them and reinvest the proceeds, out of which you could receive an income stream for life. Upon your death, the charity you have designated will receive the remainder of the trust’s assets.