Looking for a way to improve your financial picture before the clock strikes 12 on December 31? Giving appreciated property to charity may be the answer.
One of the most effective ways to deal with your year-end tax situation is by maximizing deductions that reduce your taxable income. The most flexible tool at your disposal is the charitable contribution deduction: it allows you complete control over the timing and extent of your deduction, as well as the choice of assets to fund your gift.
Many donors have come to realize that long-term appreciated property is one of the best assets to fund charitable gifts. This is true for two main reasons: the charitable deduction and the capital gains tax.
Deduct the full fair-market value
First, you can generally take a deduction for the full fair-market value of the donated property — if you itemize deductions on your federal income-tax return. That has become a much bigger if since the passage of the Tax Cuts and Jobs Act in 2017.
Many provisions of TCJA may lead to a dramatic decrease in the number of taxpayers who itemize in 2018 and in the future. The standard deduction has nearly doubled, and the new law reduces other deductions, capping the deduction for state and local taxes at $10,000 ($5,000 for married taxpayers filing separately) and restricting mortgage interest deductions to those on total principal of $750,000 or less ($375,000 for married filing separately).
Avoid capital gains tax
A second valuable benefit to giving long-term appreciated property is that you do not generally have to recognize or pay tax on appreciation over basis realized during the time that you owned the property. Capital gains tax rates can be significant, though they vary according to the type of property. For example, the rate can be up to 20 percent on securities but as much as 28 percent on tangible personal property, such as works of art or book collections.
If your modified adjusted gross income exceeds $200,000 for single people or $250,000 for those who are married filing jointly, you can also be subject to an additional 3.8 percent tax on investment income. So even if you do not itemize deductions, you may still realize major tax savings by giving long-term appreciated property instead of selling it and giving the proceeds.
Contact us today to discuss these strategies as part of your year-end planning.
