Year-End Tax Planning
This is the sixth of our Year-End Tips for Tax Planning series. Every few weeks until the end of the year, we'll give you ways to keep more of what you've earned. Use them as building blocks in your financial planning
“If you haven’t got any charity in your heart, you have the worst kind of heart trouble.” -Bob Hope.
Our clients tend to be generous people. In this post, we’re defining charity as a voluntary giving (as opposed to forced government extraction) of funds to a person or cause that you believe is important.
In the case of non-cash charitable gifts you need to be careful not to fall into several tax traps that may limit your deduction.
Here are some tips to help you avoid some common errors in the area of giving.
When donating real estate to a public charity, one can normally deduct the Fair Market Value (FMV) of the property.
This makes for a great deduction in that you are deducting all the untaxed appreciation of the asset.
There are a number of snares to avoid in this scenario:
- If you’ve owned the property (such as a stock or mutual fund) less than one year, you can only deduct your cost. You’ll get no benefit from any appreciation of the asset.
- If the item has declined in value (i.e., purchased at $100/share and now worth $80/share), you’re stuck with FMV even though it’s less than your cost.
- If your property is not going to be used to further the charity’s tax-exempt function, you could be limited to your cost as a deduction.
- Donations of Long-Term capital gain assets are limited (in the current tax year) to 30% of your Adjusted Gross Income (AGI). Just think in terms of the number at the bottom of page one of your 1040.
Let’s see how you could avoid each one of these traps.
In the first example, you could simply make sure that you give assets that you’ve owned for at least one year and a day.
The solution to the second trap is just as easy: only donate assets with appreciation.
The function test requires a bit more effort in working with the charity before the gift is made. For example, donating a valuable antique that the charity stores in its basement won’t work, but a gift of stock which they can sell for cash will.
Lastly, if the asset’s value exceeds 30% of AGI the difference can be carried forward up to five years. We’ll work with you in timing your donations and income so that this is not a problem.
When gifting a publically-traded stock, the FMV is easily determined by calling your broker. On other property that exceeds $5,000 in value, you’ll need to get an appraisal.
Remember that we’re just a click away when you need help.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.