|
A taxpayer can avoid the tax on long-term
capital gains by donating the property to a recognized
charity. If the sale of the property would result in a
long-term capital gain, but the taxpayer donates the
property to charity, the taxpayer avoids the tax on the
long-term capital gain and also receives a charitable
contribution deduction equal to the fair market value of the
property at the time of the donation. A long-term capital
gain occurs when the taxpayer sells or exchanges a capital
asset that the taxpayer has held for more than one year for
an amount that exceeds the asset's adjusted basis (usually
cost). Most long-term capital gains are taxed at a maximum
rate of 15 percent. This rate is much lower than the maximum
35-percent rate that applies to ordinary income.
However, a taxpayer can avoid even the 15-percent tax
rate on a long-term capital gain by contributing the
property to a recognized charity. In such a case, the
taxpayer does not have to recognize the gain. In addition,
the taxpayer may deduct the
fair market value of the
property as a charitable contribution.
For example, assume that a taxpayer bought land for
investment two years ago at a cost of $6,000. The land is
now worth $16,000. The taxpayer donates the land to a
recognized charity. The taxpayer does not have to recognize
the $10,000 ($16,000 - $6,000) long-term capital gain. In
addition, the taxpayer may deduct $16,000 as a charitable
contribution.
The deduction for charitable contributions of an
individual is generally limited to 50 percent of the
taxpayer's adjusted gross income (AGI). However, for
contributions of long-term capital gain property, the limit
is 30 percent of the taxpayer's AGI unless the taxpayer
elects to deduct only the adjusted basis of the property
rather than its fair market value.
The taxpayer may carry over any charitable contributions
that exceed the annual limit to the next five tax years. The
current year's contributions are deducted before any
contributions carried over from a prior year.
If the property is tangible personal property, such as a
work of art the taxpayer had purchased, the charitable
contribution deduction is limited to the taxpayer's adjusted
basis in the property. The taxpayer may not deduct the fair
market value of such property if it exceeds the property's
adjusted basis. In addition, the deduction for contributions
of property to private nonoperating foundations is limited
to the adjusted basis of the property.
If the property is ordinary income property or property
the sale of which would result in a short-term capital gain,
the deduction is also limited to the adjusted basis in the
property. However, the taxpayer would not have to recognize
the appreciation as a gain.
Taxpayers should not donate property to charity on which
they would realize a loss if they sold the property. The
deduction for the charitable contribution would be limited
to the fair market value of the property, and the taxpayer
would not recognize the loss. The taxpayer would achieve a
more favorable tax result by selling the property to realize
the loss and contributing the cash proceeds to the charity.
Of course, losses on the sale of personal use assets such as
clothing are not recognized.
While the deduction of net capital losses of an
individual or married couple is limited to $3,000 a year,
the taxpayer may carry over any unused net capital losses to
future tax years indefinitely.
The ability to contribute long-term capital gain property
to a charity to avoid the tax on the long-term capital gain
while deducting the fair market value of the property as a
charitable contribution is a great tax planning strategy.
Taxpayers who want to contribute to charity should seriously
consider using this strategy.
However, the tax law has numerous exceptions and
limitations. Therefore, a taxpayer should consult a
competent tax professional before donating any significant
amounts of property to a charity.
Alan D. Campbell is a CPA in Arkansas and Florida and is
self-employed primarily as an author of tax publications. He
earned a Ph.D. in accounting with an emphasis in taxation
from the University of North Texas. He is also admitted to
practice before the United States Tax Court. He has
published numerous articles on tax topics in professional
journals. He is the co-author of the book Tax Strategies for
the Self-Employed and the revision editor of CCH Financial
and Estate Planning Guide, 15th edition. For more tax
savings strategies, please see his blog:
http://taxsavingsstrategies.blogspot.com
Article Source:
http://EzineArticles.com/?expert=Alan_D_Campbell |
