The Right Thing: Making Charitable Contributions

By Bernstein, Phyllis | The National Public Accountant, June-July 2005 | Go to article overview

The Right Thing: Making Charitable Contributions


Bernstein, Phyllis, The National Public Accountant


The rewards of giving to charity are many. For starters, clients control when and how to reduce a tax bill and effectively reduce the actual cost of the gift. Cash donations, as long as the actual amount of the donation is substantiated, will not result in an IRS challenge. However, donations of objects, such as fine art and collectibles, are always problematic.

Clients will generally receive a higher tax deduction when they use long-term appreciated property (held more than one year) to fund contributions and avoid capital gains tax. Some property may not be eligible for a deduction at appreciated fair market value, such as securities whose fair market value is less than the cost, tangible personal property, vehicles, and ordinary income property.

Securities with a cost more than fair market value. A client's deduction will be limited to cost, and the client will lose the capital loss tax benefit, so donating these securities is just a bad idea.

Tangible personal property. When a public charitable organization uses donated property in its exempt function (a painting given to a museum, for example), clients can potentially realize an estate tax savings and receive an income tax deduction, the size of which depends on the nature and appraised value of the property donated and their personal tax situation. For property held long-term (longer than 12 months) as a capital asset, a client may generally deduct its full fair market value, as determined by a qualified appraisal (up to 30 percent AGI and five-year carryover), provided that the donated object is related to its charitable mission, such as a museum or educational institution that normally has a collection of similar paintings, silver or sports memorabilia. All of the appreciated value of the donated art object will be lost as a charitable deduction if the related use rule is not satisfied.

Note that for works donated by the artist, the income tax charitable deduction may be limited to the actual cost of materials.

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