Dear Client:
Happy Thanksgiving!
I am so thankful for having the best clients in the business. Speaking of charity and as we approach year end, I thought I might share a few tax planning tips. In the spirit of Thanksgiving, I thought I would talk about a tax benefit for a charitable gift.
While most charitable contributions allow for a tax benefit when you file your return, gifts of appreciable property such as stock you are holding with a built-in gain can supersize the tax benefit.
Appreciated property is property that has a current fair market value that is higher than your tax basis in the property. Basis is the yardstick for measuring gain or loss and usually is the original amount you paid for the property. However, special basis rules apply for inherited property, property acquired by gift, and property for which depreciation deductions are allowable, such as property used in a trade or business.
Your charitable deduction will depend on whether the appreciated property is ordinary income property or capital gain property. Ordinary income property includes inventory, and a capital asset owned for one year or less. Capital gain property includes capital assets that you owned for more than one year as well as certain real and depreciable property used in a business.
In general, your deduction for ordinary income property is limited to your basis. For example, say you bought stock five months ago for $5,000. It’s now worth $8,000. An immediate contribution of the stock would give you a deduction of $5,000, not $8,000. Now suppose you bought the stock more than one year ago for $5,000 and again contribute it when it’s worth $8,000. Here, you normally would be able to deduct the full $8,000. Plus, you would not be taxed on the $3,000 in appreciation. That is a far better result than if you sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.
Unfortunately, not all contributions of appreciated capital gain property give you a deduction for the full value of the property. Rather, your deduction is limited to basis in some cases, including when you contribute tangible personal property that is put to an unrelated use by the charity. For example, if you contribute a painting to a hospital and the hospital uses it for display, the use of the painting would be unrelated to the hospital’s charitable purpose and your deduction would be limited to your basis in the painting. On the other hand, a painting contributed to a museum and used for display by the museum would not be an unrelated use and your deduction would not be limited.
Special percentage limitations also come into play. If the property qualifies as capital gain property and it is real estate or stock, your deduction generally is limited to 30 percent of your adjusted gross income unless you make a special election.
Have a safe and thankful holiday!
Mike