Charitable donations of appreciated property.

A regular income tax deduction is allowable for charitable donations of both cash and property. The charitable deduction is easy to compute for cash donations.

Subject to certain limitations for property donations, a charitable deduction is allowable based on the property's fair market value at the time of the donation. A taxpayer who donated appreciated property has an advantage over the individual who sold appreciated property, incurred a capital gains tax and donated the net cash.

To eliminate this loophole," the Tax Reform Act of 1986 (TRA) required this unrealized appreciation to be an alternative minimum tax (AMT) preference. Treating this appreciation as an AMT preference adversely affected affluent taxpayers who had preferences from other sources and were seeking charitable deductions for donating appreciated property.

The Revenue Reconciliation Act of 1993 (RRA) eliminated this preference. However, it is not enough to consider this repeal as a relief provision. Taxpayers should be encouraged to donate appreciated long-term capital gain property. Despite the substantiation requirements discussed in the next Tax Clinic item, "Qualified Appraisals for Charitable Donations of Property," for any taxpayer making charitable donations (in any event), the savings may be quite substantial. (of course, state tax consequences also must be considered.)

The TRA's timing was significant. Many taxpayers were reeling under the 1987 drop in the stock market. They may not have had any appreciated securities, or, if they did, they may not have been inclined to donate them to charity. Therefore, the TRA did not have the impact it otherwise would have had. But given the recent trend in the stock market, if taxpayers now have paper gains, they may be more inclined to make charitable donations. Consequently, it is advisable to donate appreciated long-term capital gain property rather than cash.

This technique also should be considered by taxpayers who presently may not be making substantial charitable donations, but who wish to provide for charitable bequests in their wills. By leaving those donations until after death, they are missing out on some important tax benefits. If they were to make these donations during their lifetime, they also would obtain income tax savings. These lifetime donations would likewise reduce their estates, since the taxpayers would no longer own the property. The estate tax result would be the same as if they made charitable bequests. (Of course, if the income tax savings are not consumed, they ultimately would be subject to estate tax.)

Tax calculations and projections are important. Itemized deductions are subject to being phased out based on adjusted gross income. It will be necessary to make computations to show taxpayers how much of the charitable deduction will be left, since they may not get a tax deduction for the full donation.

The RRA's new rule applies to donations of tangible personal property made after June 30, 1992, if used for a charity's exempt purpose. For securities, land and other long-term capital gain property, it is effective only for donations made after 1992.

Refund claims should be considered if tangible personal property was donated during July 1 through Dec. 31, 1992 and generated 1992 AMT.