Based on my observation of the tax filing (or extension calculation) season we’ve just completed, here are three ideas for better results the next time around.
Donate Appreciated Property
Donating appreciated property is still one of the most effective tax planning tools at a donor’s disposal. By donating property, whether securities, artwork or something else, the inherent gain isn’t generally recognized for income tax purposes.1 Typically, the value of donated property is deductible, subject to various limits based on the donor’s income.2 If the same property were to be sold, any gain would be subject to income tax and, likely, the 3.8 percent net investment income tax as well. Even if the full value of the property isn’t deductible due to the type of charitable donee or the type of property,3 excluding the gain from income may be more valuable than the deduction. In addition to the federal tax benefits, don’t overlook the state benefits. While not all states allow deductions, and some don’t give a full benefit for charitable donations,4 no state currently treats a donation as a sale that would trigger the gain for state reporting purposes.
Use Caution With Fundraiser Tickets
Fundraiser tickets are the single greatest source of donor confusion. If a donor writes a check to a charity for a dinner or a golf outing, the difference between the payment and the value received by the donor is deductible. The charity must provide the amount of the non-deductible portion5 to the donor. Unfortunately, that non-deductible portion precludes payments being made through private foundations (PFs) or donor advised funds (DAFs). Some donors erroneously attempt to work around this rule by personally paying the non-deductible portion while having the PF or DAF pay the deductible portion. Payments made by these entities can’t be for the benefit of the donor: Because the donor can’t attend the fundraiser except by paying the full amount, any payment by the PF or DAF is a private benefit.6 There are situations in which a PF could legitimately pay the full amount if the attendance is for a charitable purpose. However, all the DAFs that I’ve worked with require a confirmation that the requested grant from the DAF doesn’t involve fundraiser tickets.
Two other indications of confusion are the statements: “But, I didn’t attend the fundraiser,” and “But, all the food and entertainment was donated.” It’s the donor’s right to attend the event, not the actual attendance, that invokes the reduction in the deduction. If the donor wants a full deduction, most response cards have a checkbox he can use for: “I’m sorry I can’t attend, but here’s my donation.” As to the second excuse, it’s the value received by the attendee, not the cost to the charity, that reduces the deduction.7
Alert Donors About Giving PTP Units
Donors need good advice before and after the donations. My email box is replete with donations with either defective or missing appraisals. These problems have to be resolved before the returns are filed (and yes, luckily, that includes by the extended due date).8
Among the other situations for which donors need good advice are donations of publicly traded partnership (PTP) units and personal property.
Some donors give PTP units, thinking that they’re just like shares of stock. Unfortunately, they’re not. Because many PTPs use debt, the donation likely triggers gain under the bargain sale rules.9 In addition, PTPs aren’t “publicly traded stock” for donations to PFs, so the deduction is, generally, limited to the lesser of basis or value,10 and the deemed bargain sale could expose the donor to penalties.11 Another, more obscure, issue for PTPs: Although PTPs are publicly traded on many exchanges, they technically aren’t securities within the definition of the regulations, which exclude publicly traded securities from the requirement to obtain a qualified appraisal.12
Many donors don’t realize that donations of large groups of similar assets (valued over $5,000) are likely to require an appraisal if they want the benefit of a tax deduction. This issue often arises after the death of a family member. The family donates a whole house full of assets and then shows up at tax time with a detailed list, perhaps even photos, but no appraisal. This scenario happens often enough that maybe it should be a standard part of the initial post-funeral conversation with heirs or executors. “Are you planning on donating your wife’s furs and jewelry/your husband’s fishing lure collection/everything in Aunt Minnie’s condo? If so, you’ll need an appraisal that meets the Internal Revenue Service requirements if you want a tax deduction.”
Of course, there are more complex donation situations, such as conservation easements, for which good advice is also essential. But, donors of PTPs and personal property seem less likely to be aware of the need for good advice in advance of the donation. And now on to those extended returns for the rest of our clients, with those thoughts in mind.
1. Property donated subject to debt is an exception to the “no gain recognized” rule.
2. Internal Revenue Code Sections 170(b) and 170(e).
3. IRC Sections 170(b) and 170(e)(1)(B).
4. For example, New York limits the charitable deduction to 25 percent of an individual’s federal charitable deduction. See N.Y. Section 615(g)(2).
5. IRC Section 6115(a).
6. IRC Section 4941(d)(1).
7. Treasury Regulations Section 1.170A-1(h)(2)(i)(B).
8. Treas. Regs. Section 1.170A-13(c)(3)(iv)(B).
9. IRC Section 1011(b) and Goodman v. United States, 1999 U.S. Dist. LEXIS 20650 (S.D. Fla. 1999).
10. IRC Section 170(e)(1)(B)(ii).
11. IRC Section 4941(a) and Treas. Regs. Section 53.4941(d)-2(a)(1).
12. Treas. Regs. Sections 1.170A-13(c)(1)(i) and 1.170A-13(c)(7)(xi).
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