Trends & Developments - Oct. 2011 - Consider Charitable Contributions of Appreciated Property
If you intend to make charitable contributions and have appreciated property being held as a capital asset that you have held for more than 12 months (“appreciated long-term capital gain property”), it is advantageous to donate the appreciated long-term capital gain property (usually stock or securities, or other property as described below). The benefit of contributing appreciated long-term capital gain property instead of cash is illustrated by the following:
(1) Amount intended for charity — $100,000
(2) Charity is a public charity
(3) Stock with a value of $100,000; tax basis of $40,000
(4) Combined federal and state tax rate: Long-Term Capital Gain — 21% Ordinary Income — 40%
ALTERNATIVE I: SELL STOCK FIRST
|Long-Term Capital Gain||
|Cash from Sale (100,000-12,600)||$87,400|
|Additional Cash to give $100,000||$12,600|
|Value to Charity||$100,000|
|Value to Stock||$100,000|
|Cash Used to Pay Tax||$12,600|
|Value Given Up||$112,600|
|Less: Value of Charitable Deduction||($40,000)|
|(40% of $100,000)|
|Cost of Charitable Gift||$72,600|
ALTERNATIVE II: GIVE DIRECTLY TO CHARITY
|Value to Charity||$100,000|
|Less: Value of Charitable Deduction (40%)||($40,000)|
|Cost of Charitable Gift||$60,000|
|Tax Savings of Alternative II:||$12,600|
To achieve this type of result, certain rules need to be followed:
- As mentioned above, you must have held the property for over 12 months.
- If the property is given to a public charity (or an operating private foundation, which is a non-publicly supported organization that devotes most of its earnings to the active conduct of its exempt purposes), the amount deductible in the current year is limited to 30% of your adjusted gross income for that year.
- If the property is given to a non-operating private foundation, the amount deductible in the current year is limited to 20% of your adjusted gross income for that year. Furthermore, a deduction is allowed for a charitable contribution of property (other than cash) to a non-operating private foundation only if the property is “qualified appreciated stock.” This is stock of a corporation for which market quotations are readily available on an established securities market. It does not include any such stock to the extent that the amount contributed to the private foundation by the donor and members of the donor’s family (when increased by prior contributions) exceeds 10% in value of all the outstanding stock of the corporation.
- For charitable contributions that exceed the 30% or 20% limit, there is a five-year carryover*.
- If you are donating tangible personal property, in order to obtain the property’s full market value as a deduction, the appreciated property must qualify for long-term capital gain treatment had it been sold and the charitable organization must use this property in its exempt function (such as a work of art given to an art museum). Otherwise, the deduction will be limited to the lesser of your tax basis or the property’s fair market value. If the charitable organization disposes of the property within three years, the charitable deduction will be limited to your tax basis, unless the organization certifies to the IRS in writing that the property’s use was, or was intended to be, related to its exempt purpose or function.
There are other requirements that should be followed in order to obtain a charitable deduction:
- Make sure the organization qualifies. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations (available at www.irs.gov).
- If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
- Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization. For any contribution of $250 or more, you need more than a bank record. You must have a written acknowledgement from the organization. It must include the amount of cash and say whether the organization provided any goods or services in exchange for the gift. If you donated property, the acknowledgement must include a description of the items and a good faith estimate of their value.
- If you claim a deduction for a contribution of property (other than cash or publicly traded securities) worth more than $5,000, you generally must obtain a qualified appraisal. A written appraisal is not required for contributions of nonpublicly traded stock with a value of $10,000 or less.
- For items with a value of $500 or more, a properly completed Form 8283 (Noncash Charitable Contributions) must be attached to your income tax return.
While the above rules and limitations must be met, doing so can achieve the tax savings associated with making charitable contributions of appreciated long-term capital gain property. As illustrated by the example, this can result in a significant reduction in the after-tax cost of your generosity.
* The adjusted gross income limitations can be increased in the following ways:
If a non-operating private foundation makes qualifying contributions out of its corpus within 2½ months after the end of its taxable year equal to 100% of the contributions it received during that year, the 20% limitation for appreciated capital gain property increases to 30%.
The 30% limitation for appreciated capital gain property donated to public charities and private operating foundations can be increased to 50% by electing to reduce the amount of your contribution to the property's cost. This is only advisable if your contributions would otherwise be limited and it is unlikely that you will benefit from the carryover in the future.
Trends & Developments – October 2011