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Plan Charitable Contributions Now

Last update on: Jun 23 2020
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Most taxpayers don’t realize the best way to contribute to charity. They also don’t know that to get the maximum benefit they need to begin estate planning early in the year. Waiting until near year-end won’t get the job done.

The optimal estate planning giving strategy is to donate noncash items. Many people are aware that they can donate stocks and mutual fund shares. Even that isn’t the best estate planning strategy. You get more bang for the buck by donating collectibles, such as art, antiques, jewelry, wine, or other personal collections.

Here’s the twist. Most people know that the top rate on long-term capital gains from securities and other investments is 15%. What they don’t know is that the maximum capital gains rate never was reduced for collectibles. The top rate on gains from collectibles held for more than one year still is 28%. You save more taxes by giving a collectible instead of stocks.

In addition, a charitable contribution ensures that this year you benefit from the full fair market value of the property. To sell it, you would have to wait some time to find a buyer willing to pay your price. Then you might owe a broker’s commission on the sale.

Plus, many collectibles’ prices did well during the stock bear market. As stocks fell, investors poured money into other assets. When the economy started picking up steam, their prices continued to rise.

Giving a collectible to charity also can ensure that it is well-cared for. You especially might want to donate a collection or valuable asset you have been preserving for years.

Generally, a donor of long-term capital gain property can deduct the fair market value of the property at the time of the contribution and does not owe taxes on the gain. There are a couple of ways that deduction might be limited or reduced.

The charity’s use of the appreciated property must be related to the charity’s exempt function in order for the donor to get the full deduction. For example, a museum must display artwork (or preserve it for future display). Most tax lawyers recommend that a donor get a letter from the charity acknowledging that it will use the property in its exempt function. If the charity does not use the property properly or sells it, the deduction is reduced by the potential capital gain in the property.

The type of charity also can limit the deduction. “Public charities” have a broad base of donors, and donors generally are allowed to deduct up to 50% of their adjusted gross income for cash contributions to them. Deductions for donations of appreciated long-term capital gain property to these charities are limited to 30% of AGI.

Gifts of long-term capital gain property to other charities are limited to 20% of AGI for the year.

Unused contributions generally can be carried forward for up to five years until they are fully deducted.

Be sure to work with a charity’s tax advisor and your own before making a contribution of property. You want to know the actual amount of your deduction before giving the property.

Charities are more willing to accept gifts of property than they were in the past. One reason is that there now are firms to help charities evaluate, accept, and sell or store various kinds of property. Charities also realize that they can net more money by accepting property instead of insisting on cash or securities.

Yet, that doesn’t mean a charity will accept anything. Most charities turn down many offers each year because they cannot use the property in their operations or because the cost of turning the property into cash would exceed the benefit. That is one reason you need to start early in the year. You need to locate a charity that is willing to take your property and, ideally, that will use it in the exempt function.

To get the maximum deduction, if the property is worth over $5,000 an independent, written appraisal must be attached to your tax return.

Expect extra scrutiny of these transactions in the next few years. A recent General Accounting Office report found that the charitable deductions for donated cars far exceed what charities net from the donations. Congress plans to examine whether taxpayers are overstating the value of the cars or whether the rules need to be changed.

A donation to charity is an ideal way to transfer a collectible. To get maximum benefit, you need to start estate planning now. Locate charities that will want your property, be able to use it, and will help maximize your deduction.

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