Tax-deductible donations can take many forms, including cash contributions or gifts of property. Taxpayers who itemize their deductions can reduce their tax bill through charitable giving. Gifts of property require additional planning compared to cash gifts to maximize the benefit to both the recipient of the gift and the donor.
Property Gift Deduction
Generally, the fair market value of a property gift at the time it is given is the write-off. The taxpayer might only be able to deduct her basis in the property if the gain from selling it would be taxed at ordinary rates, such as stock held for less than a year or inventory used in business. Capital assets that have increased in value and assets that have fallen in value are deductible at their fair market value.
Selling Property For Donations
Some property gifts are intended to provide revenue for a charity. Most tax-exempt organizations don’t have any use for corporate stock aside from selling it off for proceeds. Although it might not make sense to donate property that a charity will just sell, giving the property intact often has better tax results. Tax law requires the donor to recognize any gain or loss on the sale of property. If the property is sold at a gain, the donor must pay tax on the profit even though he immediately donates the proceeds.
Under limited circumstances donors get the better tax treatment by selling a capital asset and donating the proceeds. When an asset falls in value, the taxpayer’s basis will exceed the fair market value. Should the taxpayer donate that asset intact, he could only deduct the fair market value. By selling the asset and donating the proceeds, the taxpayer gets a tax deduction for the difference between the basis and the fair market value along with the normal charitable contribution deduction.
Limitation on Deductions
Tax law places limits on how much someone can deduct for their charitable contributions. That limit depends on what type of contribution is behind the deduction. Cash is subject to an annual maximum of 50 percent of adjusted gross income. Gifts of property, on the other hand, might be subject to a lower 30 percent of AGI limit if the property is appreciated capital gains property. Any deduction disallowed by the limit can be taken in the subsequent five years. A special provision allows taxpayers to reduce part or all of a capital asset gift to their basis and take advantage of the higher deduction limit available for other types of donations.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.