The right thing: making charitable contributions.
Clients will generally receive a higher tax deduction when they use long-term appreciated property (held more than one year) to fund contributions and avoid capital gains tax. Some property may not be eligible for a deduction at appreciated fair market value, such as securities whose fair market value is less than the cost, tangible personal property, vehicles, and ordinary income property.
Securities with a cost more than fair market value. A client's deduction will be limited to cost, and the client will lose the capital loss tax benefit, so donating these securities is just a bad idea.
Tangible personal property. When a public charitable organization uses donated property in its exempt function (a painting given to a museum, for example), clients can potentially realize an estate tax savings and receive an income tax deduction, the size of which depends on the nature and appraised value of the property donated and their personal tax situation. For property held long-term (longer than 12 months) as a capital asset, a client may generally deduct its full fair market value, as determined by a qualified appraisal (up to 30 percent AGI and five-year carryover), provided that the donated object is related to its charitable mission, such as a museum or educational institution that normally has a collection of similar paintings, silver or sports memorabilia. All of the appreciated value of the donated art object will be lost as a charitable deduction if the related use rule is not satisfied.
Note that for works donated by the artist, the income tax charitable deduction may be limited to the actual cost of materials. For dealers, the income tax charitable deduction may be limited to the actual cost of works of art held as inventory.
For deductions of art objects and other personal property over $5,000, Form 8283, Section B, must be completed. This is signed by the donor, the person donating the piece and the appraiser. If your client donates art objects valued at $20,000 or more, however, the client must attach a complete copy of the signed qualified appraisal.
Vehicles. As of Jan. 1, 2005, the tax deduction on donating cars, boats and airplanes worth more than $500 is limited to the amount the nonprofit organization receives once the car is resold. The nonprofit organization will be required to send the donor a letter informing the donor of the resale and the value the donor can report to the IRS.
Ordinary income property. The deduction for ordinary income property is the lesser of fair market value or its basis.
These examples are just a few of the variety of issues when clients plan to donate property to charitable organizations. The total value of a charitable contribution deduction and certain other itemized deductions may be limited, depending on your client's adjusted gross income and the amount and type of donation.
There are many other estate planning options available which are beyond the scope of this article, such as charitable remainder trusts, charitable remainder unitrusts, pooled income fund trusts, charitable lead trusts, charitable lead unitrusts, and charitable annuities. I strongly encourage clients to open a dialogue with charities, and obtain the advice and assistance of attorneys and CPAs experienced in charitable donations of personal property.
Phyllis Bernstein, CPA, is president of Phyllis Bernstein Consulting, Inc. in New York City. Contact her at Phyllis@pbconsults.com.