The Investment Scientist

Tax planning tip: Timing and type of charitable gifts

Posted on: October 9, 2012

Tax planning tips

[Guest Post By Cal Klausner] Charitable contributions should be timed so as to obtain the maximum tax benefits, either in 2012 or 2013. If a taxpayer plans to make a charitable contribution in 2013, he should consider making it this year instead if speeding up the deduction would produce an overall tax saving, e.g., because the taxpayer will be in a higher marginal tax bracket in 2012 than in 2013.

On the other hand, a taxpayer who expects to be in a higher bracket in 2013 should consider deferring a contribution until that year. This task is more difficult than in prior years because of uncertainty over whether rates will rise next year under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) sunset.

In making any sizeable charitable contributions, to the extent possible, clients should make the contributions in appreciated capital gain property that would result in long-term capital gain if sold. That way, a deduction generally is obtained for the full value of the property, such as shares of stock, etc., while any regular income tax on the appreciation in value is avoided. (However, for tangible personal property, this favorable treatment is only available if the donated item is related to the exempt purpose of the donee charity.)

Recommendation: If a client owns appreciated property which he expects to appreciate still further in value and which he wants to continue to hold so as to benefit from the additional appreciation, the client should consider using cash that he would otherwise contribute to charity to buy additional property of the same type and contribute the property he first owned to charity. Not only will he get a deduction equal to the full fair market value of the property he contributes to charity, he will have a higher basis in the newly acquired property, thus reducing the amount of gain he will recognize if he sells it.

 Observation: If rates rise after this year as currently scheduled under the EGTRRA sunset, the tax savings on a later sale could be even greater. It should be noted, however, that contributions of appreciated capital gain property generally are subject to a 30%-of-AGI (adjusted gross income) ceiling, instead of the usual 50% ceiling, unless a special election is made to reduce the deductible amount of the contribution.

Observation: Making the election will limit the donor’s deduction to the basis of the contributed property. In most cases, the election should be made only if the fair market value of the property is only slightly higher than the basis of the property.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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