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Are you considering making charitable contributions to your church? If so, you need to be aware of a number of factors, some of which are new as a result of the Pension Protection Act of 2006.
In summary, they are:
• IRS approved charities.
• Allowable income tax deductions for various categories of gifts.
• The substantiation of value rules for each type and value of property given.
• The penalties for overvaluation.
• How to deliver the gift and when it is deemed a completed gift.
This article will cover the charitable deductions allowed for four common categories of charitable contributions.
Cash
This is the most straightforward. Whatever you give, you can claim a charitable deduction. However, each category of gift has its own limitation based on your adjusted gross income (AGI) and the type of charity (public or private family foundations). The limit for cash contributions to a public charity is 50% of AGI. Churches are public charities.
Stocks, Bonds, Real Estate
If the asset has been held for more than a year, the charitable donation deduction is the fair market value. However, for real estate, some situations may limit the deduction to the cost basis.
If the asset has been held for less than a year, it would produce ordinary income, not a capital gain, if sold. Therefore, the deduction is limited to the cost basis. Other examples of charitable contributions limited to the cost basis are works of art donated by the artist and inventory.
As an example of a gift of inventory, my church has an annual shoe drive to benefit children. If the owner of a shoe store donated 50 pairs of shoes, the charitable deduction would be limited to the cost basis, not the retail price.
Series E and EE Bonds
Charitable contributions of Series E bonds require a different series of steps in order to result in a charitable donation. Series E bonds cannot be transferred to a charity during the owner's lifetime. You would first have to cash in the bonds, pay the tax on the gain (which has been deferred similar to an annuity) and then contribute whatever is left over.
Planes, Trains and Automobiles
There are new rules, which became effective January 1, 2005 in order to qualify for the car donation deduction.
If the charity doesn't have a use for the vehicle donated and sells it, the charitable deduction is whatever they get for it or the fair market value, if lower. However, if the charity fixes it up, uses it or plans to give the vehicle to a needy person, the charitable tax deduction is the fair market value.
Charitable Contributions Caution
Before you make any gift, you should consult with a qualified tax professional. Furthermore, some gifts may not be acceptable to the church or have to pass through a review process (life insurance is a good example). Therefore, in these situations bring the church into the charitable donation process early on as well.
Robert D. Cavanaugh, CLU is a 39-year veteran of the life insurance and financial and estate planning industry. He is the publisher of The Smart Giver, a charitable contributions educational program which teaches techniques to increase income, reduce taxes while simultaneously helping the church. Additional information about church stewardship can be found at his blog.
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