To help you get started, let’s take a look at the tax implications of charitable donations. In most cases, federal law lets you deduct the value of charitable contributions made during your lifetime if you itemize deductions. Therefore, your actual cost of giving equals the value of the property donated minus the tax savings. Keep in mind, however, that the tax law also establishes certain limits regarding charitable gift deductions. The amount you can deduct in any one year depends on the type of charity to which you donate, the type of property contributed and the way the charity uses the gift. In addition, you must itemize your deductions on your tax return in order to be able to take a charitable contribution deduction at all.
If you do itemize, then in order for your contributions to be deductible, the charity must be one of the qualified organizations, which are listed in IRS Publication 78. The law also distinguishes between public charities – which include churches, schools and other organizations that receive primary support from the public or the government – and private charitable entities, like a foundation, which are supported by a single individual or family. Gifts to public charities are given more favorable tax treatment than gifts to private foundations.
The type of property that you give is also considered in the amount of the tax deduction allowed. For example, if you give a cash gift to your local school, your annual deduction limitation will generally be higher than if you give a gift of appreciated property. Appreciated property can include items like securities or land that may have increased in value. Contributions to public charities of cash and property that are not long-term capital gain investments are deductible up to 50 percent of the donor’s adjusted gross income while appreciated property contributions have a 30 percent limitation.
While appreciated property has a lower annual deduction limitation, many choose to use investments to enhance the benefits of charitable giving. This is one way to fulfill your obligations at the lowest after-tax cost by donating appreciated securities you have held for more than one year instead of cash. By donating stock, for example, you can obtain a deduction for the stock’s current market value and avoid paying taxes on the capital gain you would have realized if you had sold the stock and donated the proceeds.
Here’s how it works: Suppose you are married, file a joint tax return and are in the 35 percent tax bracket. You own a number of shares of XYZ stock, now worth about $40 per share, for which you paid $20 per share more than one year ago. You have pledged a $4,000 contribution to your church this year and are considering alternative ways to fund the contribution. If you donated your stock directly, you would need to donate 100 shares (100 x $40 = $4,000). If you sold your shares, however, you would have to pay capital gains tax on your gain. Although you could raise $4,000 by selling 100 shares, you would owe $300 in capital gains taxes ($20 gain per share x 100 shares x 15%); therefore, you would fall short. With this approach, you would need to sell 109 shares to raise $4,000. By contributing shares rather than selling them and contributing the proceeds, you reduce the “cost” of your contribution and give up fewer shares.
While most people do not give to a charity for their own financial benefit, it is very important to understand these rules of taxation. You may be able to avoid any unexpected tax consequences and, more importantly, be able to preserve the spirit of goodwill and make the most of your charitable contributions.
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This article was provided by Eddie Waren, manager of A.G. Edwards & Sons, Inc., Member SIPC. He is the brother of CityView’s publisher, Marshal Waren.