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Charitable Donations
If you are planning
to make a relatively substantial contribution to a church, charity,
college, etc., you should consider donating appreciated stock from
your investment portfolio instead of cash. Your tax benefits from
the donation can be increased and the organization will be just
as happy to receive the stock.
Charitable
donations of appreciated stock:
This tax-planning
tool is derived from the general rule that the deduction for a
donation of property to charity is equal to the fair market value
of the donated property. Where the donated property is "gain"
property, the donor does not have to recognize the gain on the
donated property. These rules allow for the "doubling up," so
to speak, of tax benefits: a charitable deduction, plus avoiding
tax on the appreciation in value of the donated property.
Example:
Tim
and Tina are twins, each of whom attended the University of Tennessee.
Each plans to donate $10,000 to the school. Each also owns $10,000
worth of stock in ABC, Inc. which he or she bought for just $2,000
several years ago.
Tim sells
his stock and donates the $10,000 cash. He gets a $10,000 charitable
deduction, but must report his $8,000 capital gain on the stock.
Tina donates
the stock directly to the school. She gets the same $10,000
charitable deduction and avoids any tax on the capital gain.
The school is just as happy to receive the stock, which it can
immediately sell for its $10,000 value in any case.
Caution:
While this plan works for Tina in the above example, it will not
work if the stock has not been held for more than one year. It
would be treated as "ordinary income property" for these purposes
and the charitable deduction would be limited to the stock's $2,000
cost. Also, your donation will be limited to 30% of your adjusted
gross income.
If the property
is other ordinary income property, e.g., inventory, similar limitations
apply. Limitations may also apply to donations of long-term capital
gain property that is tangible (not stock), and personal (not
realty).
Donating
works of art to charity have even more special rules and should
be investigated if you desire to follow this avenue.
Finally,
depending on the amounts involved and the rest of your tax picture
for the year, taking advantage of these tax benefits may trigger
alternative minimum tax concerns.
Donating
a used car to charity:
For these
reasons, you may want to consider a different option for your
old car: donating it to charity. Under this approach, you will
be entitled to a charitable deduction equal to the fair market
value of the car. The value is usually set according to the "Blue
Book" listings for used cars published by the National Automobile
Dealers Association. In some cases, this value will exceed the
amount you could actually get on a sale. If the car is in terrible
condition, however, and is worth much less than its "Blue book"
value, you must use its true market value, not its "Blue Book"
value.
The donation
approach saves you the trouble involved with trying to sell the
car. Many charities even offer the added convenience of picking
up the car at your home and saving you the trip.
Proving your
right to the deduction. If you donate your used car to charity,
make sure you take the steps needed to substantiate your tax deduction.
First, you need a written acknowledgement from the charitable
organization stating that you made the donation, describing the
car, and noting that the charity provided no services in exchange
for it.
Second, if
the value is over $500, Form 8283 must be attached to your tax
return showing when and how you acquired the car and its original
cost. If the value is over $5,000, special rules requiring an
appraisal apply.
Be sure to
consult with a tax advisor for proper planning and implementation
of tax savings ideas to be sure they are right for you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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