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When it comes to charitable donations, some people make these contributions out of the kindness of their hearts. Others do so because there are tax benefits while others are in both camps.
In all cases (assuming related tax deductions are pursued), advisors can help clients because there are tax issues to be considered. Fortunately, donating to charity is one of the few things involving the IRS and taxes that isn’t overly complex.
“Charitable contribution deductions for cash contributions to public charities and operating foundations are limited to up to 60% of a taxpayer's adjusted gross income (AGI),” according to Investopedia.
But what about noncash donations? This is an increasingly prominent part of the world of charitable giving with many charities actually asking for goods or investable assets instead of assets. Data confirm clients and donors are responding to that trend with more considering donating assets such as real estate or stocks to charities instead of cash. Advisors can add considerable value on this front because many clients aren’t aware of the tax perks associated with noncash giving.
Multiple Benefits in Noncash Giving
Noncash giving is one of myriad examples of the value in having tax services in-house. Clients will appreciate the efficiency and they’ll really appreciate it when an advisor illuminates them to the tax perks associated with noncash donations.
Those include the elimination of capital gains that the client would normally be on the hook for if the asset was sold the traditional way and a deduction of up to the asset’s fair market value.
In a hypothetical example, an advisor could help a client donate $10,000 worth of ABC Inc. shares to a charity. Due to the fact that the stock was donated, the client pays no capital gains even the stock rose of the client’s ownership period and the client can claim a deduction equivalent to the market value of the shares.
“In addition, the possible elimination of capital gains tax on the sale of an asset can also increase your donation amount to the nonprofit. (See below.) Because they are tax-exempt organizations, 501(c)(3) nonprofits can then sell these assets without any tax consequences,” according to Charles Schwab.
Identify the Right Assets
A big part of realizing the aforementioned tax perks vis a vis noncash giving boils down to donating the right assets. Yes, making a donation of any kind is a positive move and the charity is sure to appreciate, but some noncash assets are better suited for this form of giving than others.
Illliquid assets such as art, wine or vintage cars and baseball cards certainly have value, but they can be a pain for charities to monetize and those assets are governed by different tax implications than are more traditional fare such as bonds, real estate and stocks.
“Special rules apply to certain types of assets that may limit their value or transferability. Art and collectibles, for example, are subject to the IRS' ‘related use’ rule; generally, if you donate these assets to a charity that doesn't use them to fulfill its mission, your deduction may be the lesser of the original value or the fair market value of donated property,” adds Schwab. “Noncash gifts can involve very complicated analysis, so it’s important to consult your tax or legal advisor.”
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