Get a Jump on Charitable Giving

Charitable giving tends to be clustered in the last couple of months of the year. But if you want to maximize charitable giving and your after-tax wealth, begin your charitable gift planning now. Instead of rushing the process in the busy year-end period, take the time today to plan the best way to make gifts this year.

There are a variety of ways to make charitable gifts. Review your balance sheet and decide which giving method best fits your assets and goals.  Here are the strategies to consider.

Cash donations. The simplest way to give is to write a check. All you get from this is a charitable contribution deduction, if you itemize expenses on Schedule A. Some of this deduction might be reduced if your income is high enough to trigger the itemized deduction reduction.

Use a credit card. The IRS has ruled that you take the deduction in the year the charge was recorded against the account. It doesn’t matter to the IRS when you actually pay the bill. Many charities now take credit cards because of this ruling. (Any interest you pay on the credit card charge is not deductible as a contribution.)

Give appreciated stocks or mutual funds. With gifts of most appreciated long-term capital gain assets, you deduct the current fair market value of the property. The capital gains that occurred while you owned the property are not taxed. You get the double benefit of avoiding taxes on the gains and taking the charitable contribution deduction. The deduction is limited to 20% to 50% of your adjusted gross income, depending on the charity.

Give a collectible. The long-term capital gains tax rate for collectibles never was reduced to 15%. It remains at 28%. If you own art, antiques, jewelry, wine or some other personal collection, consider using it to make a charitable gift instead of selling. You will save more taxes than by giving stocks or funds. Collectible owners often find that charitable gifts are the best way to liquidate their collections. The alternative is to wait to find an appropriate buyer who is willing to pay the true value.

Give on the installment plan. Sometimes you don’t have to give away property completely in one year. The IRS allows you to give it in stages and deduct the contributions as they are made.

Suppose you own some 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 it the rest of the year. The museum does not have to assert its right to take possession of the work for you to take the deduction. You might end up having possession of it until the 10 years have expired.

A potential payoff 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 have 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 also work with property other than art. Real estate can be given under either the installment plan or fractional giving. The owner can 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.

If you give a public charity appreciated long-term capital gain property, such as stocks or mutual funds, you deduct the fair market value up to 50% of your adjusted gross income. But for other personal property, such as art or collectibles, and gifts to non-public charities, the deduction is limited to 30% of your adjusted gross income. Excess deductions can be carried forward up to five years.

Remember also that at higher incomes itemized expenses, including charitable contributions are reduced. You won’t get the full deduction.