Charitable Contributions

Many charities conduct fund-raising campaigns during the last three months of the year. Likewise, donors tend to make contributions at the end of the calendar year. Before making contributions to your favorite charities, it is a good idea to review the basic tax rules for charitable contribution deductions.

Qualified Organizations: Contributions of cash or property to a qualified organization generally can be claimed as an itemized deduction from gross income. Qualified charitable entities are noted in IRS Publication 78, Cumulative List of Organizations.

Contribution of Property: Cash contributions are the most common; however, gifts of property may result in greater tax benefits. The charitable contribution itemized deduction equals the fair market value (FMV) of the property donated (with certain limitations). A donation of appreciated property provides a current deduction for the FMV of the gift, while avoiding capital gains taxes that would have been paid if the property had been sold.

Example: Consider a $10,000 cash contribution and a contribution of publicly traded stock FMV $10,000. The donor’s basis in the stock is $5,000, and the stock was held over 18 months.Assuming adjusted gross income (AGI) limitations do not apply, a $10,000 itemized deduction is available from both. An additional $1,000 tax savings is realized from the appreciated stock contribution -- the donor avoids the 20% long-term capital gains tax on the stock appreciation ($5,000 x 20%).

If the stock had been held 12 through 18 months, the avoided capital gains tax would be $1,400 ($5,000 x 28%).

Investment property held at a loss should not be donated directly to a charity -- the donor would forego the right to net the loss against other gains. In this situation, the property should be sold, with the proceeds donated to charity.

Collectibles: Special rules apply to contributions of appreciated art or other collectibles. The contribution deduction is limited to the donor’s cost basis if appreciated art is contributed to a museum (tax-exempt organization) and the art (1) is to be sold, or (2) is not used for the museum’s exempt purpose. A FMV deduction is allowed, however, if the art is used for the museum’s exempt purpose.

Contributions of Household Goods: An itemized deduction is usually available for the FMV of clothes and household goods donated to charity. Obtain a receipt from the charity listing the items donated. The taxpayer must determine the FMV of donated property (FMV is generally the price a buyer would pay in an "arm’s-length transaction" for the item). There is no formula for computing the FMV of clothes or household goods, but the charity may provide guidelines for you to consider. If the FMV deduction for contributed property is overstated, penalties of 20% to 40% of the tax underpayment could apply.

Contributions of Old Vehicles: A number of charities will accept a contribution of an old car, truck, or boat -- in many cases, the organization will pick up the vehicle, or have it towed at no charge to the donor. Document the vehicle’s FMV, considering its condition.

Example: The Blue Book value of the car, in good condition, is $2,000. Your car, however, is not in good condition -- extensive repairs are needed. Several car dealers indicated the retail value of the car is $600; therefore, the FMV deduction allowed would be $600.

Mileage Deduction: If you use your car for a charitable purpose, an itemized deduction may be available. For 1997 tax returns, the deduction equals 12¢ per mile driven for a charitable purpose (for 1998, the rate is 14¢).

Deduction Limitations: In any one year, the itemized deduction for contributions to public charities cannot exceed 50% of the donor’s adjusted gross income (AGI). There is a five-year carryforward for any unused contributions. The following chart illustrates (1) the valuation of the charitable deduction (cost basis or FMV), and (2) AGI limitations for different types of property.

Limitations are computed using a step process, with cash contributions deducted first.

Example: AGI equals $50,000, and donations to a church (public charity/similar entity) are as follows: cash $5,000 and land FMV $20,000 (land held for more than one year).The maximum charitable deduction allowed for the year is $25,000 ($50,000 AGI x 50%). The current deduction will be $20,000 -- $5,000 cash and $15,000 land ($50,000 x 30%).

The maximum available deduction was not used; consequently, there is a $5,000 noncash contribution carryforward (which must be used within the next five years).

Reporting Requirements: If total noncash donations exceed $500, IRS Form 8283, Noncash Charitable Contributions, must be filed. Required information includes the name and address of the charity, and the FMV of donated property. An appraisal summary will be needed for property contributions (other than publicly traded securities) greater than $5,000. Receipts from charities are required for individual contributions of $250 or more.

These are some thoughts to consider about charitable contributions. Your financial and tax advisers can provide additional information and should be consulted before any action is taken.

\| DT Online Home \| Site Search \| Personal Finance Advisor \|
	Charitable Contributions Personal Finance Advisor by Deloitte & Touche OnLine October 13, 1997