Get the Maximum Tax Advantage from Donated Property
The benefits of charitable giving are vast, with research supporting a correlation between giving, health, and happiness. Researchers at Harvard Business School reviewed the studies and research on the benefits of giving. In their working paper, "Feeling Good About Giving", they asserted the psychological benefits of giving were real, but may be exaggerated. The research showed the causal relationship between giving and happiness may also be more of a circular relationship, where happier people give more, which makes them happier.
The Tax Benefits
Regardless of the extent to which giving contributes to health or happiness, there is no denying the tax benefits of giving. Charitable gifting of cash offers you a tax benefit equal to your highest marginal tax rate times the amount of money you donated. A person in the 25% tax bracket who donates $100 would then receive $25 back on their taxes.
Many also donate property as part of their giving. Donating property offers the ability benefit a charity while also capturing some of the property value in the form of a tax deduction. But donating property has different rules than donating cash.
Considerations When Donating Property and Items to a Charity.
Depending on the type of property you're donating, the nature of the property, the charity you are donating to, and other factors, your tax benefits could be significantly reduced. Before you donate property, ask these four key questions.
How Will the Charity Use the Property?
When you donate an item to a charity, if the charity cannot use the item for its exempt purpose, you won't be able to deduct the full value of the property. In the case of a charity that will sell the property and then use the money to fund their charity, the maximum amount you can deduct on your taxes is your adjusted basis for the property. Your adjusted basis is generally the amount you paid for the property, not the fair market value.
To get the full deduction of the fair market value, the charity must use the property you donate to further its stated mission. As an example, if you are donating old books, donating the books to your church or to an animal welfare charity would not allow you to deduct the fair market value. The reason is it is unlikely your church or the animal charity would be able to use the books for religious purposes or for prevention of cruelty to animals.
The same books, however, donated to your community library, University, or an art museum would allow you to deduct the full fair market value of the book collection. This is because the donated items would be used by the charity for the exempt purpose of the charity. The library would lend the books out to others, the University would offer them up for their students to study, and the museum would display the books to the public.
Be selective of the charity you choose, and donate items appropriate to each charity.
Has the Property Gone Down in Value Since You Purchased It?
If you donate property to a charity, the maximum tax deduction you can take is the lesser of the fair market value and your adjusted basis. If your property has gone down in value since you purchased it, donating the property will give you the lower tax deduction, but you will lose your ability to use the loss as a capital gains deduction.
Let's say that you bought a piece of artwork for $500 and it is now worth only $100. If you donate the artwork, the maximum tax deduction you can take is $100, the lesser of the fair market value and what you paid for it.
If instead, you sold the artwork for $100 and donated $100 cash, you would get the $100 income tax deduction and also get a $400 capital loss tax deduction. The $400 could then be used to offset another capital gain. By selling the property and donating the money, you can get the full fair market value tax deduction by combining a charitable tax deduction with a tax offset against your capital gains.
How Long Have You Held the Property?
If the property is a capital asset, such as stock, real estate, or another investment property, the length of time you've held the asset will make a big difference in how much you can deduct. If you owned the asset for less than one year, you would be subject to ordinary income taxes if you were to sell it. As a result, the amount you can deduct is limited to your adjusted basis.
If you were to hold that same asset for one year and one day, it would become a long-term capital asset. Long-term capital assets, when donated, can be deducted on your taxes for the full fair market value of the asset.
Let's say you own ABC stock, which you wanted to donate to charity. You bought the stock on January 4th for $100 and the stock has appreciated to $400. If you donate the stock to a charity before January 4th of the following year, the maximum tax deduction you could get is the original $100 you paid for it. On the other hand, if you waited until January 5 of the following year, the stock would be considered a long-term capital gain. You would be able to deduct the full fair market value of $500 for the stock.
How Much Money Do You Make?
The IRS allows an individual to deduct a maximum of 50% of their 'contribution base.' For most taxpayers, their contribution base is their adjusted gross income. If you donate a large, high-value item that is worth more than 50% of your adjusted gross income, you will not be able to take the full tax deduction for the item. Consider the value of all of your charitable activities as you plan your annual and other charitable plans.
The 50% of your contribution base limit can be further reduced depending on the type of charity you donate to and the nature of the items donated. As an example, long-term capital gain property, real estate, and tangible personal property all have a ceiling of 30% of adjusted gross income. Depending on these factors, the cap can be as low as 20% of your contribution base.
Before you donate any property, determine if the value of your total charitable giving approaches 20% of your adjusted gross. If it does, make sure to talk with a professional tax advisor or financial planning professional to determine if you will get the full tax deduction.
Get Advice When Doing End of Year Giving
The end of the year is often the best time to give to charity. Not only are you in a giving mood, but you have a chance to make an impact on the tax return you are going to file at the beginning of the next year. The last few months of the year are an ideal time to start talking to a professional tax advisor or financial planner about giving to your local religious organization or charity. Remember, the tax code is complex, and a professional advisor is necessary to make sure you get the maximum benefit while benefiting those in need.
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