It is the charitable giving season, and the tax code is here to help you. Most folks will write checks of after-tax dollars to their favorite charities. A few shrewd taxpayers, however, will give in different ways, enabling them to get higher tax write offs and to provide more help to the charities.
Before making any contribution, however, be sure to check the stealth taxes. These can reduce or eliminate the tax benefits of your contribution. The Pease provision reduces itemized deductions, including charitable contributions, for “high income” taxpayers. It kicks in when adjusted gross income is above $139,500. The alternative minimum tax also reduces tax benefits. Though intended only for the very wealthy, it now is snaring many upper middle class and even middle class taxpayers. Details of the stealth taxes are in the Tax Watch section of the web site Archive. Now, let’s look at some specific strategies.
Use it, enjoy it, give it. Most of you have heard radio commercials extolling gifts of autos or boats to charity. If the asset was a personal asset (not depreciated for business), you can give it and deduct the current fair market value as a charitable contribution (provided there is no debt on the property).
Few people realize the same strategy can be used for other assets. Suppose you buy a piece of art. You can display it in your home for a few years. After you have enjoyed it, donate it to a charity. If you held the property for more than one year, you can deduct its current value.
This strategy is available for almost any type of personal use property that a charity is willing to accept. You deduct the fair market value in most cases. Be sure the property is not business property and that you held it for longer than one year and double check with a tax advisor.
Give appreciated investments. Many of you are looking at positive returns on your investment account statements. One option for giving, of course, is to write a check from your after-tax income and donate that. But you will end up with more money, or be able to give more, if you keep the cash. Transfer appreciated investment assets that you have held for more than one year to the charity. These can include mutual fund shares, stocks, bonds, art, collectables, and real estate. You won’t owe any capital gains taxes on the appreciation and will deduct the current fair market value. Most charities will accept property contributions, though not always all types of property.
Use a credit card. You eventually will have to pay the credit card company with after-tax cash. But the IRS has ruled that contributions made on a credit card can be deducted in the year that the charge was recorded against the account. It doesn’t matter to the IRS when you actually pay the bill. Many charities now will take credit cards because of this ruling. (Any interest you pay on the credit card charge is not deductible as a contribution.)
Give on the installment plan. Sometimes you don’t have to away property completely this year. The IRS allows you to give it gradually and deduct the contributions as they are made.
Let’s go back to that work of art. You want a tax deduction this year, but you aren’t ready to part with the art. Instead of giving the entire work to a museum or other charity, give a fractional share. You could give the museum a 10% interest every year for 10 years. You get a deduction of 10% of the current value each year. The museum has the right to take possession of the art for its pro rata period of the year, and you have the right to the rest of the year. The museum does not have to assert its right to take possession of the work. You might end up having possession of it until the 10 years have expired.
A potential pay off for you is that if the museum displays and publicizes the art, its value could rise. That gives you a higher deduction each year and a higher total deduction over time than if you had simply donated the entire piece at one time.
You need a written agreement with the museum to satisfy the IRS that you really gave partial legal ownership of the property.
Give a fractional share. Instead of giving a share each year, give a one time partial gift. You could assign to a charity, say, 25% ownership of the artwork. You deduct 25% of the current value. The charity has the right to use the work for 25% of the year, and you get it the rest of the year. Again, the charity doesn’t have to use the artwork. It just has to have the right to use it for you to get the deduction. You and the charity need to draft rules covering the sharing. For example, you might want to be sure that you have possession during certain times of the year.
These last two strategies work with property other than art. Real estate is another type of property that works well with either the installment plan or fractional giving. One common strategy is for an owner of a vacation home to donate to charity the right to off season use of the property. The individual owner rents or uses the property during the prime season. The charity then gets to use it as a retreat or for other purposes during the off season.
Let’s take a quick review of the tax rules for deducting contributions of property. If you give a charity appreciated stocks or mutual funds that have been held for more than one year, in most cases you can deduct the full fair market value up to 50% of your adjusted gross income. No one pays taxes on the appreciation. But if you give other personal property, such as art or collectables, that you owned for more than one year, you deduct the fair market value only up to 30% of your adjusted gross income.
Excess deductions can be used in future years up to five years. But for personal property the charity must use the property in a way that is related to its exempt purpose. It cannot sell the property and use the cash proceeds. You and the charity might be able to creatively agree on what assets are related to the exempt purpose. With any donation of property, get a letter from the charity stating its intention to use the property for its exempt purpose. Otherwise, you might lose a deduction.
Large charitable gifts also require more reporting on your tax return. When a contribution of property is between $500 and $5,000, you have to provide details about the gifts on Section A of Form 8283. When the value exceeds $5,000, you have to include a qualified appraisal. Complete details about the reporting requirements are in IRS Publication 561 “Determining The Value Of Donated Property” and Publication 526 “Charitable Contributions” available on the IRS web site or by calling 800-TAX-FORM. For some free information about charitable giving strategies generally, check the web sites www.pg-resources.com (no hyphen) or www.nolo.com.