Tax revision gives extra meaning to seasonal giving this year
'Tis the season for giving - and being asked to give more. This time of year, hundreds of charities boost their fund-raising efforts, often tying their appeals to the holiday theme of helping those less fortunate.
This year, the charities have a new ally: tax reform. After this year, charitable contributions won't be deductible to people who don't itemize deductions, and the deductions will be worth less to some who do itemize. So charities have been urging people to give all they can this year to get the full deduction, which could mean getting Uncle Sam to pay for as much as half the donation.
For some taxpayers, especially if they are well over the income needed for the existing 50 percent top tax bracket, the advice makes sense. But like most all-encompassing recommendations, this one doesn't encompass everyone. Millions of people are in moderate income brackets, yet they still itemize, usually because they own a home and the interest on their mortgage and their property taxes push them into deductible territory.
Someone with a taxable income of $33,000, for example, will have a federal tax bite of 28 percent in 1986, 1987, and 1988. The tax on a $50,000 income falls only three percentage points, from 38 to 35 percent in 1987, then to 28 percent in 1988.
At these levels, the taxes saved from bunching up deductions for charitable contributions aren't enough to justify a major change in your financial planning or accelerating your donation schedule. Those charities will need money next year, too, and contribution will be just about as valuable in 1987 or '88 as it was this year.
On the other hand, for people who don't itemize and those at upper-income levels, the advantages of squeezing in a donation this year could be great. Non-itemizers have been able to deduct charitable contributions since the 1981 tax law. That law also scheduled the end of the privilege in 1987; this year's tax bill simply affirmed the schedule.
Under the 1981 tax bill, if you did not itemize you could deduct 50 percent of your contributions from your 1985 taxes. This year, you will be able to deduct 100 percent of those donations. So with the deduction crashing to zero next year, a donation made by a non-itemizer before New Year's will be greatly appreciated by both the donor and the charity.
People in the upper echelons of income have a different reason to accelerate their donations, but for them it's no less important. If they're earning more than $200,000, a $1,000 contribution saves $500 on their tax bill. Next year, the savings fall to $385, and in 1987, the savings come to just $280.
Sometimes people in upper brackets make substantial gifts of property, including stock, to their favorite charities. Tax reform also makes these gifts more valuable this year. This year, your cost of the gift is half the stock's value, minus whatever tax you would have paid had you sold the stock on your own.
Next year, the savings will be less, and in 1988 they'll be even lower, amounting to no more than 28 percent of the cost of the gift. Even worse, you may incur a ``penalty tax'' under the now-tougher alternative minimum tax rules. This tax is used when people go too far, in the tax collector's eyes, in tax avoidance. If you are considering a large donation of cash or property, see your tax adviser or accountant to get some help figuring out the best method and timing for your generosity. Newsletter clampdown
There's another effort under way to get some of your money before the end of the year, but you can skip this one, no matter what income bracket you're in.
After this year, subscription costs for newsletters, professional publications, and organization dues will be lumped in with miscellaneous deductions, and only the costs that exceed 2 percent of taxable income will be deductible.
In an effort to get around this, some publishers of business magazines and investment newsletters have been heavily promoting multi-year subscriptions. Pay five or 10 years in advance, these publishers say, and you can claim the full multi-year deduction on this year's taxes.
No, you can't, the Internal Revenue Service has ruled. Only the cost of next year's subscription will be deductible next year. This also applies to certain professional dues and expenses, the IRS ruled.