How to make donations that are good for the head and the heart
For many people in Hawaii, giving to charity is one of the best deduction planning opportunities around, because you can enjoy not only a sizable tax deduction but also the satisfaction of doing good.
Deductions for charitable gifts are subject to adjusted gross income (AGI) limits based on the form of the donation and the type of charity.
Forms of donation include cash and unappreciated property, ordinary income property, or long-term capital gains property.
Contributions disallowed due to the AGI limit can be carried forward for up to five years.
Deductions may be further limited by recent provisions enacted as part of the Pension Protection Act of 2006.
But the Act also provides new giving opportunities.
For example, through 2007, the Act allows taxpayers 70 and older to contribute to a charity up to $100,000 directly from their IRA, avoiding contribution limits. You will not get a tax deduction, but you will avoid any tax that would have been owed had those funds been distributed to you or a beneficiary.
In determining your charitable-giving strategy, you need to consider what to give, as well as how to give it. Outright gifts of cash are the easiest, and probably the most common gifts to charity. The new tax laws now require you to keep a cancelled check, credit card receipt or other form of substantiation for every dollar you contribute. Otherwise, cash donations are quite simple.
Gifts of property are a little more complicated. Your deduction depends in part on the type of property donated. For example, if you contribute ordinary income property (such as stock held less than a year, inventory or property subject to depreciation recapture), you can receive a deduction equal to the lesser of fair market value or your tax basis.
One of the best charitable giving strategies is to donate appreciated property that would otherwise be subject to income tax on long-term capital gain if sold.
Because you not only escape the capital gains tax, but also can usually take an income tax deduction at fair market value. The property must be a capital asset, such as stocks, bonds or other securities, and meet the long-term holding period of more than 12 months.
Contributions of appreciated long-term capital gains property are limited to 30 percent of your AGI (or 20 percent depending on the type of charitable recipient).
This limitation can be increased to 50 percent if you elect to deduct the basis rather than the fair market value for most property. This may prove to be more favorable in limited circumstances, depending on your AGI and the likelihood of using -- within the next five years -- the carryover you would have if you deducted the fair market value and the 30 percent limit applied.
Property donations also have detailed reporting requirements. For example, those valued at more than $5,000 (other than publicly traded securities) must be supported by a qualified appraisal, with an appraisal summary attached to the tax return.
With the end of the year approaching and the holidays upon us, a well-planned gift to a qualified charity can meet your charitable goals, and give you a chance to be more personally involved with the charities close to your heart.
Nicole Borgman is a senior tax manager for Grant Thornton LLP. She can be reached at Nicole.Borgman@gt.com