You have your favorite charitable passions. They may be providing for underprivileged children, protecting abused animals or supporting your church.
There are a variety of ways to give. The most common gift is the direct gift of money by cash, check, debit or credit card. But you also could give a gift of something other than money. It could be a gift of appreciated marketable securities or a gift of art. You may want to donate your old car or a parcel of real estate.
Congress encourages charitable contributions. The general rule is that charitable contributions are deductible for federal income tax purposes as an itemized deduction on your Form 1040 – Individual Income Tax Return. The amount of that charitable deduction you can take depends on the type of organization to which the gift is made, the type of property being contributed and the value of the charitable gift.
Generally, money gifts you make to public charities, such as churches, hospitals, educational organizations, or publically/governmentally supported organizations are deductible so long as they do not exceed 50% of your contribution base, which is typically your adjusted gross income (“AGI”). If the charity to which you donate is not a public charity, it is considered a private foundation. Money donations to private foundations are limited to 30% of your AGI.
Gifts of ordinary income property, such as inventory or stock held for less than a year, are limited to your tax basis in the property, but are subject to the same 50% and 30% limits as money gifts.
You can carry over contributions in excess of the 50% or 30% limits to the next five succeeding tax years. If you die during those five years, any unused contribution carryforwards are lost.
If you make a gift to a charity in trust or the gift is long-term capital gain property, such as appreciated stock, your contributions are limited to a lesser amount, 30% of your AGI for gifts to public charities and 20% of your AGI for gifts to private foundations. You can use the fair market value of the property on the date of gift for your deduction without recognizing the gain on the appreciation for gifts of long-term capital gain property to public charities and gifts of qualified publicly traded marketable securities to private foundations. For gifts of other long-term capital gain property to private foundations, you must use your tax basis in the property.
You can avoid the 30% limitation for contributions of long-term capital gain property to a public charity and use the 50% limit if you deduct your tax basis in the property instead of the fair market value on the date of gift.
For tangible personal property, such as art or books, you can use the fair market value on the date of gift just like long-term capital gain property if you have held the property long-term (over one year) and the property is related to the charity’s exempt purpose. For example, art would be related to an art museum’s exempt purpose but not the exempt purpose of a wildlife sanctuary. For all other tangible personal property, you can only deduct your tax basis in the property.
If you contribute property with a fair market value that is less than your tax basis, your deduction is limited to its fair market value. You can’t claim a deduction for your full tax basis in that property. For example, if you donate used clothing and household items, your deduction will not be what you paid for them, but what they were worth on the date of the donation, typically thrift shop value.
These are just a few of the rules governing the income tax effects of charitable contributions. For more information, see Publication 526 – Charitable Contributions on www.irs.gov. For advice on your particular situation, you should consult with a knowledgeable income tax professional.
By Matthew M. Wallace, CPA, JD
Published edited July 1, 2016 in Savvy magazine, Port Huron, Michigan as: Reaping the income tax benefits of charitable giving