Save taxes by donating appreciated assets

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One of the most effective but sometimes unknown ways to make a charitable donation to a nonprofit organization is by giving appreciated assets such as stocks, real estate or investments. The donation of appreciated assets when properly planned can have a tax benefit to the taxpayer as well as provide a significant and lasting benefit to the charitable organization. This approach also allows a donor to make a meaningful contribution to a charity without necessarily impacting their monthly cash flow.

In order to take advantage of this tax saving strategy, the donor needs to keep in mind the following factors. First, the taxpayer needs to determine that the item being donated is a capital asset. Capital assets are usually personal property (not business property) that if held for over one year would be subject to long term capital gain rates when sold. Examples of capital assets would be stocks, rental properties, bonds, jewelry, coin collections and cars.

Next, the taxpayer needs to donate the investment directly to the charity without selling it first. If the donor sells the investment personally and then donates the money to charity, they will need to report the capital gain on their personal income tax returns and pay the appropriate long term capital gains taxes. This transaction reduces the amount of the charitable deduction available to the donor and also results in less cash contributed to the nonprofit organization.

If the donor adheres to these factors, they are allowed a tax deduction equal to the fair market value of the donated item and will not be subject to any taxation. This fair market value deduction is allowed regardless of the basis (usually the purchase price) in the investment by the taxpayer. The taxpayer’s deduction for a donation to charity can be up to 30% of their adjusted gross income in any given year. Any donation over the 30% limitation can be carried forward and used in the future up to five years.

As individuals start reviewing their year-end tax plans, this strategy can significantly reduce a taxpayer’s income tax liability. But before making a donation you should discuss your specific situation with your tax advisor.

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