Donors should give appreciated property to their favorite charity. Appreciated property is property whose Fair Market Value exceeds the cost basis. Cost basis is generally what was paid for an item.
Here are 5 reasons why:
1) Avoid Capital Gains Tax
By making a gift of appreciated property, the donor is avoiding paying capital gains on this asset. For example, let's say a donor can make a cash gift of $10,000. Certainly they could just write a check. Let's say they also own stock worth $10,000 and the cost basis of $2,000. If they sold the stock and then donated the cash, this would not be a smart tax move. They would owe capital gains tax on the difference between the sale price of $10,000 and the cost basis of $2,000. An $8,000 capital gain at 15% federal capital gains tax rate would be $1,200 in federal income tax. By giving the stock directly to the charity, this capital gains tax is avoided.
2) Get an Income Tax Deduction
Donations make to qualified charities are eligible for an income tax deduction. To get the deduction, the taxpayer must itemize their deductions on Schedule A. Taxpayers can take the higher of the standard deduction or their itemized deductions. There are some limitations on charitable donations. For gifts of appreciated property, the deduction is limited to 30% of Adjusted Gross Income ("AGI"). Any amounts over this limit can be carried forward and deducted for five years. The limit for cash donations is a little more generous as this is 50% of AGI.
3) Get the Asset Out of Your Estate
Donations are out of your estate. If you have a taxable estate, this is a very big deal. The current federal estate tax exclusion is $5 million for 2011 and 2012. Granted not many people will be subject to a federal estate tax if in fact this exclusion stays in effect. Look carefully however at your state estate exclusion. In Connecticut, the estate tax exclusion is currently $2 million. Again, not everyone will be subject to a state estate tax. But more people will be subject to a state tax than a federal tax.
4) Help the Charity
In the current economy many charities are hurting. They need all of the help they can get. You will need to figure out if you will be making a restricted gift or an unrestricted gift. Charities like unrestricted gifts; they can do whatever they want with the funds. Make sure you do your homework on your charities.
5) Feel Good
Last, but certainly not least. If you have been fortunate in your life, it's important to give something back. It doesn't need to be your whole nest egg. Just something to say, "Thank You."
ACTION ITEM: Donors should consider giving appreciated property. The benefits over making cash gifts are huge.
Thomas F. Scanlon, CPA, CFP®
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