Fully Appreciating Year-End Charitable Gifts


As year-end approaches, many of you are finalizing your charitable gifts for the year.

Pile of gorgeous giftsFor tax deductibility purposes, charitable contributions are governed by several rules. One of the best strategies to reduce your income tax bill when you give is to give appreciated property instead of cash.

For example, if you own a stock or another asset that no longer fits in with your investment strategies or portfolio, you could give the asset directly to a charitable organization and take an income tax deduction for the current appreciated value of the gifted stock or other asset. The charitable organization can then sell the asset and pay no tax since it is a tax exempt entity and then have the entire cash proceeds for its use.

If, instead, you were to sell the asset, you would owe federal capital gains tax and state income tax on any gain as a result of the sale. This would leave you with less money to contribute to the charity and your tax deduction would be further reduced since it would only be for the net amount of cash you contribute to the charity after paying taxes instead of the full appreciated value. So, you would pay taxes on the sale and have a reduced deduction.

For federal income tax purposes, deductions for gifts of appreciated property are limited to 30% of one’s adjusted gross income. As a practical matter, however, most folks’ contributions do not reach this level. Even if part of your charitable contribution could not be used because of this IRS rule, the contribution could be carried over for the next five years.

Regardless of the amount of the gift, you can save often a good or substantial amount in income taxes by gifting property instead of cash.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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