Taxpayers who itemize their deductions are allowed an income tax deduction for charitable contributions which are actually paid during the taxable year. For tax purposes, a charitable contribution is a contribution to a "permissible donee" made without expectation of commensurate benefit. Organizations qualifying for tax deduction contributions are listed in IRS publication 78.
Capital Gain Property
Gifts of appreciated property often prove advantageous from a tax standpoint because capital gain is usually not required to be recognized when the property is contributed and you receive a deduction for the entire value of the property. These comments will be limited to the impact of gifts of long-term capital gain property. If you subsequently decide to contribute any property that would not generate a long-term capital gain if sold rather than donated (i.e., held for less than one year), additional considerations would have to be addressed. The starting point for determining the amount deductible for a contribution of appreciated capital gain property is the fair market value of the property. There are, however, two significant limitations on the amount that a donor may deduct:
Capital Gain Reduction: Certain contributions must be reduced by the amount that would have been long-term capital gain if the property had been sold instead of contributed. Such a reduction is required for: (1) gifts of tangible personal property with a use unrelated to the exempt purposes of the recipient organization; and (2) most gifts to private foundations.
Applicable Percentage Limitation: The maximum charitable contributions deduction for any taxable year is limited to a certain percentage of a donor's adjusted gross income. The applicable limitation depends on the identity of the donee, the form of the gift and the type of property contributed. For an outright contribution to a public charity of capital gain property, which is not required to be reduced as discussed above, the controlling percentage limitation is 30%.
With regard to the second reduction, the maximum deduction for your aggregate gifts of such property for the year of contribution would be limited to 30% of your adjusted gross income. Amounts in excess of the 30% limitation may be carried forward and used in the succeeding five tax years. This limitation can be circumvented through the use of a private non-operating foundation to accept your contribution. This is a strategem we have used in the case of large contributions of appreciated property where the taxpayer wishes to raise the deduction limitation from 30% to 50% of AGI.
Election to Reduce Deductible Amount
One simple method to raise the deductible amount of contributions of appreciated property is the election to reduce the deductible amount.. A donor who contributes capital gain property which is not required to be reduced by the capital gain component may nevertheless elect to reduce the contribution. If the election is made, the applicable percentage limitation is increased to 50%. In other words, by electing to reduce the total amount deductible with respect to a contribution, a taxpayer may increase the maximum amount deductible in the year of contribution. The election is generally advantageous only if the amount of appreciation is insubstantial. Before deciding to make the election, however, we would have to consider all the relevant factors, including your current and expected future income tax rates and the amount of your previous and expected future contributions.
All charitable contributions must be substantiated in the manner prescribed by the IRS. The extent of substantiation required depends on the type and claimed value of the property donated.
All contributions of $250 or more must be substantiated by a written acknowledgment from the donee organization before a deduction is allowed. The acknowledgment must state the amount of money or description of property and whether any consideration was given in exchange for the contribution.
For property, other than publicly traded securities, with a claimed value exceeding $5,000, a donor must obtain a qualified appraisal to substantiate the value of the property. A qualified appraisal is an appraisal prepared by an independent appraiser that contains specific information about the property, the value of the property, the valuation method and the qualifications of the appraiser. A summary of the qualified appraisal, which must be signed by the appraiser and the donee, is required to be attached to the donor's tax return. Less stringent substantiation requirements are imposed in the case of gifts of publicly traded securities and gifts of property not exceeding $5,000 in value. The question of valuation of contributed property should not be taken lightly. If the claimed value is excessive, a donor may be subject to an overvaluation penalty as well as other sanctions.
The foregoing discussion was designed to give you an idea of the principal issues that arise in connection with a charitable contribution of appreciated property. Once you have decided which properties are available for contribution, we can reach some specific conclusions about the selection of property and the timing of contributions with the goal of maximizing the benefit of your charitable contributions deduction.