With the increase in tax rates for capital gains to 20% for higher income taxpayers with adjusted gross incomes over $400,000 for single taxpayers and $450,000 for married taxpayers, coupled with the additional 3.8% additional net investment income tax for taxpayers with adjusted gross income in excess of $200,000 for single taxpayer’s and $250,000 for married taxpayers, tax planning is critical.
The charitable minded taxpayer should consider contributing highly appreciated assets that would produce long-term capital gains, such as marketable securities. The taxpayer would receive a charitable deduction for the full fair market value of the asset given, thus avoiding any income tax on the appreciation. If personal property is given to a charity, the deduction equal to the fair market value can only be taken if the donated personal property is used in conjunction with the charity’s exempt purpose, such as a painting to an art museum.
The charitable deduction is limited to 50% of adjusted gross income for cash donations and non appreciated assets. The charitable deduction for appreciated assets is limited to 30% of the taxpayer’s adjusted gross income (20% for private foundations) unless an election is made to reduce the deduction to the asset’s adjusted basis. If the charitable deduction is limited for a particular year, the disallowed amount can be carried over to the next five taxable years. For assets donated other than publicly traded securities, if the fair market value exceeds $5,000, then the taxpayer must obtain a qualified appraisal.
There are many charities that have 50% Missouri tax credits available, with some being as high as 70%. A taxpayer in the 39.6% federal tax bracket and 6% Missouri could receive a tax benefit of $956 from a $1,000 donation to a charity with 50 % tax credits available ($456 benefit from the deduction and $500 benefit for the Missouri credits).
The taxpayer would be net out of pocket $44 for the $1,000 donation. And if the taxpayer gave appreciated long-term capital gain property, he would avoid any tax on the appreciation. If the taxpayer will be in a lower tax bracket in 2015, then it would make more sense to make an impending donation in 2014, rather than in 2015. Of course, the reverse would be true if the taxpayer will be in a higher tax bracket in 2015 than in 2014.
Contact us today if you have any questions about planning for charitable contributions.
written by Brenda Logsdon, CPA, Partner