When you give away property, you have to take advantage of what the tax code allows. To receive a tax deduction when donating money or assets, there are a few important points to keep in mind.
First, for it to be deductible, the donation must be made in cash or property. The donation also must be given to a qualified charity as defined by the Internal Revenue Service. And the property or cash contribution must be made before the close of your tax year for it to be deductible.
As much as possible, you should try to avoid giving away property or assets that have gone down in value because you won’t be able to take advantage of the capital loss.
A better approach would be to first sell the asset to generate a realized loss and then give the cash to the charity. This way you’ll have a deduction for the loss, as well as a deduction for the charitable contribution.
Plus, the charity still gets the same amount. Who says you can’t have your cake and eat it, too?
But if you are dealing with appreciated property, you don’t want to sell it first because you’ll be taxed on the realized gain. You, instead, can give the appreciated property away to a charitable organization.
Because it is a charity, it won’t owe tax when it sells the asset, and you will save taxes by not triggering a taxable capital gain. You also will end up with a larger deduction since you are giving the entire appreciated value of the asset away.
While these are the general rules on charitable giving, you should keep in mind that larger gifts have income percentage limitations that cannot be exceeded for deductions, as well as special rules for long-term capital gain property.
• Mike Piershale, ChFC, is president of Piershale Financial Group. Send any financial questions you wish to have answered in this column to Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. Fax the group at 815-455-6895 or email email@example.com.