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Year-end tax guide: Charitable deductions

RFP
2015 Year-end tax guideCharity isn’t just good for the soul. Lawmakers have made sure it also comes with generous tax incentives. If you’ve got a large net worth, you can use more-complex techniques to combine charitable giving with estate planning and achieve powerful income and transfer tax benefits. Just because you’re helping others doesn’t mean you shouldn’t be taking full advantage of the benefits Congress has created to encourage giving.

But beware. Before giving, you need to understand the limits on charitable deductions and whether your itemized deductions will be phased out and by how much. The “Pease” phaseout discussed in Chapter 2 can reduce the benefit from your charitable deduction by up to 80%.



FAQs
Q: Can I donate clothing or household goods?
They must be in at least “good used condition” to be deductible.

Q: When do I need a receipt?
Cash donations of $250 or more must be substantiated by the charity. Under $250, a canceled check or credit card receipt is sufficient.

Q: Can I deduct the value of my services?
No, you cannot deduct the fair market value of donated services, only your out-of-pocket expenses.

Q: Can I get a deduction for letting a charity use my property?
No deduction is allowed because it isn’t considered a gift of your interest in the property to the charity.

Q: Can I get a deduction for driving?
You may deduct 14 cents for each charitable mile driven.

Q: Can I deduct the value of a donated car?
Unless the car is used by the charity in its tax-exempt function, you can deduct only what the charity receives when it sells the car.


Choosing what to give
The first step in your charitable giving is to determine what exactly you want to give: cash or property. Depending on what you give and to whom, the amount you can deduct may be limited. Contributions that are disallowed because they exceed the limits placed on your adjusted gross income (AGI) can be carried forward for up to five years. See our table for the deduction limit by donation and the type of charity.

AGI limits on charitable contribution deductions
(click to view chart)

Outright gifts of cash (which include gifts made by check, credit card or payroll deductions) are the easiest. Yet despite the simplicity and high AGI limits for outright cash gifts, gifts of property may be more beneficial. It’s a little more complicated to make them, but they often provide more tax benefits when planned properly. Your deduction depends in part on the type of property donated: long-term capital gains property, ordinary income property or tangible personal property. Your deduction could also depend on what the charity plans to do with the donated property.

Ordinary income property includes items such as stock held for less than one year, inventory and property subject to depreciation recapture. You can receive a deduction equal to only the lesser of fair market value or your tax basis.

Long-term capital gains property includes stocks and other securities you’ve held more than one year. It’s one of the best charitable gifts because you can take a charitable deduction equal to its current fair market value.

But beware. It may be better to elect to deduct the basis rather than the fair market value because the AGI limitation will be higher. Whether this is beneficial will depend 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% limit applied.



Planning tip: Give appreciated property to enhance savings
Consider donating appreciated property to charity because you avoid paying tax on the long-term capital gain you would incur if you sold the property, thus lightening your tax bill. But don’t donate depreciated property. Sell it first and give the proceeds to charity so you can take both the capital loss and the charitable deduction.

Example:
(click to view chart)


Tangible personal property can include items like a piece of art or an antique. Your deduction depends on the type of property and the charity, and there are several rules to consider:

  • Personal property valued at more than $5,000 (other than publicly traded securities) must be supported by a qualified appraisal.
  • If the property isn’t used by the charity in its tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis in the property.
  • If the property is related to the charity’s tax-exempt function (such as a painting donated to an art museum), you can deduct the property’s fair market value.


Tax law change alert: Congress has yet to extend tax-free IRA gifts
As this guide went to print, Congress hadn’t yet extended a helpful tax provision that allows taxpayers 70½ and older to make tax-free charitable distributions from individual retirement accounts (IRAs). Doing so would usually save you more in taxes than a charitable deduction would. That’s because a charitable deduction can be reduced by limitations and phaseouts, and erases taxable income only after you’ve already calculated your AGI. When you’re allowed instead to make the gift straight from an IRA distribution, the amount of the gift won’t be included in income at all, lowering your AGI. Congress has proposed extending this provision for 2015, so check with your local Grant Thornton tax professional for an update.


Combining estate planning and charitable giving
If you have a large estate and ambitious giving plans, you may want to consider leveraging your generosity with vehicles such as a donor-advised fund or a private foundation. But nothing beats techniques that combine charitable giving and estate planning to give you both income tax benefits and transfer tax relief. Read our planning tips to see if a charitable remainder trust (CRT) or grantor charitable lead annuity trust (CLAT) would help you.


Planning tip: CRT
A charitable remainder trust (CRT) may be appropriate if you own property that would generate a large capital gain if sold. You would like to sell the asset to generate a stream of income but don’t want to pay the large capital gains bill.

You contribute property to a CRT, and the trust pays you income over a number of years, with the remainder going to a charity after the trust term ends. So long as certain requirements are met, the property is deductible from your estate for estate tax purposes and you receive a current income tax deduction for the present value of the remainder interest transferred to the charity. Because a CRT is a tax-exempt entity, it can sell the property without having to pay tax on the gain.

You don’t recognize income until actually receiving the distributions from the CRT.

To keep CRTs from being used primarily to avoid tax, the value of the charity’s remainder interest must equal at least 10% of the initial net fair market value of the property at the time it’s contributed to the trust. There are other rules concerning distributions and the types of transactions the trust may enter.


Planning tip: CLAT
A charitable lead annuity trust (CLAT) is basically the opposite of a CRT but provides a similar benefit. For a given term, the trust pays income to one or more charities, and the trust’s remaining assets pass to your designated beneficiary at the term’s end. It is not a taxable gift if the annuity payment to charity is structured so that based on the IRS’s prescribed interest rates, the expected value at the end of the term is zero. Assuming the assets appreciate faster than the IRS’s low rates, a hefty sum can be passed on tax-free to your heirs. You don’t receive a charitable deduction yourself when the trust makes its annual charitable annuity payment, but the trust’s income is removed from your return, and the trust can take a charitable deduction against its income.

Example:
(click to view chart)



Contact

David Walser T +1 602 474 3410
E david.walser@us.gt.com

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