The taxpayer may avoid tax on capital gains in the long run, donating the property to a charity recognized. If the sale of the property would result in a capital gain in the long term, but the taxpayer donates property to charity, the taxpayer avoids the tax on capital gain in the long term and also receives a charitable contribution deduction equal to fair value market the property at the time of donation.
Most of the gains of long-term capital are taxed at a maximum rate of 15 percent. This rate is much lower than the maximum rate of 35 percent that applies to ordinary income.
However, the taxpayer can avoid even the rate of 15 percent on a capital gain in the long term, contributing to the property to a charity recognized. In this case, the taxpayer must recognize gain. Furthermore, the taxpayer may deduct the fair market value of the property as a charitable contribution.
For example, suppose a taxpayer purchased land for investment, for two years at a cost of $ 6,000. The land is now worth $ 16,000. The taxpayer donates the land to a charity recognized. The taxpayer does not have to recognize the $ 10,000 ($ 16,000 – $ 6,000) capital gain of long duration. In addition, taxpayers can deduct $ 16,000 as a contribution to charity.
The deduction of charitable contributions of an individual is generally limited to 50 percent of the taxpayer’s adjusted gross income (AGI). However, for the contributions of long-term capital gain property, the limit is 30 percent of the AGI of the taxpayer unless the taxpayer chooses to deduct only the adjusted basis of the property instead of its fair market value.
The taxpayer may no longer any charitable contributions that exceed the annual limit for the next five fiscal years. The contributions of the current year are deducted before all contributions made over a year earlier.
If the property is tangible personal property, like a work of art, the taxpayer had purchased, the deduction is limited to the charitable contribution to the taxpayer’s adjusted basis in the property. The taxpayer cannot deduct the fair market value of such property, if it exceeds the adjusted basis of the property. Moreover, the deduction for contributions of non-operating assets to private foundations is limited to the adjusted basis of the property.
If the property is ordinary income property or selling property that would result in a capital gain in the short term, the deduction is also limited to adjusted basis in the property. However, the taxpayer would not recognize the appreciation as a gain.
Taxpayers should not donate goods to charity in which it would take a loss if the property sold. The charitable contribution deduction would be limited to the market value of the property, and the taxpayer does not recognize the loss. The taxpayer must obtain a more favorable tax result for the sale of the property to carry out the confiscation of money and contribute to charity. Naturally, the losses on the sale of personal property such as clothes are not recognized.
While the deduction of net capital losses of a married couple or individual is limited to $ 3,000 a year, the taxpayer can exercise used on any net capital losses to future tax years indefinitely.
The ability to contribute to the capital gain in the long run, owned by a charity to avoid tax on capital gain in the long term, while the deduction of fair market value of the property as a charitable contribution is a great tax planning strategy. Taxpayers who want to contribute to charity should seriously consider using this strategy.
However, the tax law has numerous exceptions and limitations. Therefore, the taxpayer should consult a competent tax professional before donating any significant amount of goods to charities.