Tax strategies for charitable donations

Adam Krause
by Adam Krause, Contributor

As the holidays approach, many of us are put into a charitable frame of mind. That’s no coincidence: the chance to decrease your tax burden through a strategy of deducting charitable donations is just around the corner.

In order to take advantage of this strategy, you have to itemize your donations on your income tax return. If you donate items to a charitable organization such as Goodwill or the Salvation Army, make sure to get receipts in the unlikely case of a tax audit. An organization of that scale will have set values for commonly donated items that you can apply to your own contributions. If you donate items with a combined fair market value of more than $500 in a given tax year, attach Tax Form 8283 to your return.

Donating cash is a more straightforward tax deduction strategy. However, there are limits to how much you can donate and deduct. Cash contributions can be claimed for a tax deduction up to 50% of your MAGI (modified adjusted gross income.) You can also carry over contributions that exceed this limit into the following tax year.

Capital assets (such as real estate, stocks and bonds) can be donated in an often overlooked tax strategy that many investors will find beneficial. If you have an investment that has appreciated in value, and is thus subject to capital gains tax, you can donate it to charity and it will be appraised at its current value rather than what you originally paid for it. This allows for an even larger deduction. The limit on deductions for appreciated capital gains assets is 30% of your MAGI.

However, there are additional tax strategies that may come in handy. If you sell land or any other appreciated asset at an auction where the proceeds go to charity, you can deduct these contributions at fair market value even if they exceed 50% of your MAGI. Appraisal fees, to find out what your charitable contribution is worth, can also be deducted.

If you are holding on to depreciated property, you may want to use the strategy of selling it and giving the proceeds to a charitable organization, rather than donating the property itself. Since a capital loss is deductible, this strategy will allow you to deduct your initial loss and then deduct the property again as a charitable contribution.

Donating it directly will result in your only being able to deduct it once, and you will miss out on being able to deduct the difference between its current value and what you originally paid.