How to Get an Income Tax Deduction for Contributions of character to Ch…

You can get a deduction in computing income tax in the USA for contributions to charities. Deductions are allowed for cash or character. Special rules apply, though, for contributions of character. The rules differ for contributions of differing types of character. This article summarizes the rules.

To be deductible, the contribution must be to an organization that qualifies as a charity under IRS rules. A charity can tell you if it qualifies. It MUST have an employer identification number to qualify, and it MUST have applied to the IRS for qualification. The charity should tell you this information. If they don’t have it, they may not be a qualified charity.

The amount of deductible is generally the fair market value of the character. However, the deduction for contributions of certain types of character is limited, as discussed below.

Valuation of character

Deductions for contributions of character are based on the fair market value of the character at the date of the contribution. For character for which a regular market exists and for which prices are freely determinable, the value is based on such market. consequently, stocks, bonds, mutual funds, traded commodities, traded futures contracts, and foreign money values are those quoted on such markets. For other character, the valuation is often contested by the IRS, already where there is an appraisal. Appraisals by a qualified appraiser are required for contributions of character valued above $5,000.

Vehicles present special problems, since the exact condition of the means is often hard to document. The “blue book” value may bear little resemblance to the actual value. Example: Bill donates his 2002 Toyota to Cars for Kangaroos when the complete retail price for an excellent condition one is $4,500. However, Bills car has body damage, the engine doesn’t run, and the transmission’s broken. The car is clearly not worth $4,500, in spite of of what the tow truck driver tells Bill. Bill must get a believable receipt from the charity to prove his deduction.

More information is obtainable in Income Tax in the USA, 2013 edition.

Personal character Contributions

The income tax deduction for contributions of personal character is generally limited to the taxpayer’s basis in such character plus the amount of capital gain (but not ordinary income) the taxpayer would recognize if the character were sold. consequently, the deduction for contributions of business items (inventory, equipment, etc.) may be limited to basis. meaningful exceptions are discussed below.

The deduction for contribution of publicly quoted stock by other than a dealer in securities is generally the fair market value of such stock or securities. No deduction is allowed for stock or securities issued by the taxpayer. Example: Phil established Phillow, a software company, contributing $50,000 for his shares. After going public and numerous stock splits, Phil owns 100 million shares, worth $100 each. Phil contributes 10,000 shares of Phillow stock to a 501(c)(3) organization that is not a private foundation. Phil gets a deduction of $1 million for the contribution.

A contribution of a future interest in tangible personal character is considered made only when all intervening interests have expired.{26 CFR 1.170A-5} A contribution of less than a complete interest in personal character is also unprotected to other limitations.{26 CFR 1.170A-7}

To be deductible for income tax purposes, contributed household items (clothing, furniture, etc.) must be in good or better condition and of more than minimal value. Household items, for this purpose, do not include food, artworks, jewelry, or collectables, or donated items worth more than $500 if a qualified appraisal is attached to the taxpayer’s return. Example: Sam purchased an antique chair for $10,000. The chair was not in good condition, but had been used by the town’s founder. Sam donated the chair to the local museum, and attached appropriate appraisals to his return. Sam gets a deduction for the appraised value of the chair.

Intellectual character Contributions

Contributions of intellectual character are limited to the smaller of the taxpayer’s modificated basis in the character or the character’s fair market value. In addition, however, the taxpayer may claim a charitable contribution deduction for a percentage of the income the charity receives from the character.{26 USC 170(m)} This percentage is 100% for the first year ending on or after the date of the contribution, and declines by 10 percentage points per year, ending with a 10% deduction for the 11th and 12th years. However, the additional income-based deductions cannot be claimed until the cumulative amounts go beyond the original deduction. For this purpose, intellectual character includes patents, copyrights, trademarks, trade names, trade secrets, know-how, software not obtainable to the general public for buy, and similar character. Example: Jane develops a new invention and donates the patent to the university where she works. Jane can deduct the value of the patent in addition as the university’s income from licensing the patent.

Real character Contributions

Contributions of interests in real character to the types of organizations and uses above are generally deductible. However, due to the character of real character and the variety of possible interests therein, several additional rules apply.

Types of Interests in Real character

Interests in real character can be make up of consistently outright ownership (fee simple interest), interests in minerals in place in the ground that have no rights to the surface other than access (mineral interests), and uncompletely interests. uncompletely interests may include a joint ownership, lifetime right to use, rights to access or specific use, residual interests following lapse of other interests, and other types of rights often called easements. Each of these interests is a bundle of specific rights to use of the character, is generally transferable, and generally has value on its own.

Example: Noel Bob owns 40 acres of farmland outright and has a 40-year farming easement an nearby 40 acres. His house is on the corner of his 40 acres, including a half acre yard. The easement is transferable. Noel decides to retire. He sells the complete farming rights, in perpetuity, for his 40 acres, retaining a life interest in the house and yard. He also sells the farming easement. He transfers as a gift to his children the remainder interest in the house and yard. He transfers the remainder interest in the farm land to the state college farming program. These transfers must be analyzed separately for tax effects.

Contribution of uncompletely Interests in Real character

A contribution of a remainder interest in a personal residence where the donor retains a life interest is generally deductible if the other requirements for deduction are met.{26 CFR 1.170A-7} Example: Ellen transfers to her church a remainder interest in her house, retaining a life interest (expiring on her death). Ellen can claim a deduction for the value of the remainder interest, which is generally determined based on the current fair market value of the house and mortality tables.

A move of an undivided interest in all of a character is also generally deductible, as are transfers of complete interests in specific, severable aspects of the character (such as mineral rights).

A deduction is permitted for contribution of a remainder interest in the donor’s dominant or secondary residence or form.{26 USC 170(f)(3)(B); 26 CFR 1.170A-7(b)} Transfers of other uncompletely interests are deductible only if the move would be deductible if transferred in trust.

Contributions Made in Trust

A contribution may be made directly to a charity or in trust. However, to be deductible a contribution in trust must meet additional requirements.{26 USC 170(f)(2)} A contribution of a future interest in character other than a personal residence is deductible only if the trust meets certain requirements. The trust must be either a pooled income fund maintained by the charity, a charitable remainder trust that pays the noncharitable beneficiary a fixed annuity, or a charitable unitrust that pays a fixed percentage of annual asset value of the trust.

Insurance and Annuities

A taxpayer may contribute an insurance policy or annuity to a charity and claim a deduction for the value of the policy or annuity. An individual may also buy an annuity from a charity for more than the value of the annuity and claim a deduction for the excess. However, the deduction is not allowed if the charity must pay part of the premiums, with exceptions.{26 USC 170(f)(10)}

Special Fully Deductible Items

Certain types of contributions are unprotected to the 50% limit and deductible at complete fair market value in spite of of other restrictions.{26 USC 170(e)} These include items described in the following paragraphs.

Real character

A contribution of an interest in real character to a governmental entity or a private foundation (or a subsidiary thereof) is fully deductible at fair market value if the interest will be used for a general range of recreation, historic, or pictureque purposes.{26 USC 170(h)} The use need not be open to the public. The interest can be merely a deed restriction preventing certain types development, or may be outright ownership of the land or buildings. Special rules apply with respect to historic buildings. Example: King Jim owns a mansion and 500 acre estate in New Jersey which he plans to keep in the family and neither sell nor develop. The king’s appraiser says rights to develop apartments on the land would be worth $10 million. The king donates a no-development easement to the New Jersey Kings Land Conservancy, a private foundation, and he retains all other ownership and use of the land, which is not open to the public. The king gets a deduction for $10 million, limited to 50% of his AGI.

Personal character

Contribution of shares of a corporation (by other than the issuing corporation) are fully deductible (unprotected to limits based on the donee) if market quotations are freely obtainable for the shares and they are capital assets of the donor.{26 USC 170(e)(5)}

Contribution of certain inventory items is fully deductible unprotected to some limits. Such character includes:{26 USC 170(e)}

– Contributions by a corporation of items for use by the charity in care of the ill, needy, or infants, where the donor receives no consideration. However, the deduction is reduced by half the gain the taxpayer would have recognized, and is limited to twice the corporation’s basis.

– Contributions of food by any taxpayer, unprotected to these limitations on use and deduction.

– Contributions of books to public schools, unprotected to these limitations on deduction, but not use.

– Contributions of new inventory made by the taxpayer to a qualified research organization (including colleges and research labs)

– Contributions by a corporation of new or used computers, peripherals, and software for use by schools or libraries in the USA, where the donor receives no consideration. However, the deduction is reduced by half the gain the taxpayer would have recognized, and is limited to twice the corporation’s basis.

Recapture on Charity’s Disposition of character

If a charity disposes of any of the above specially deductible items within 3 years of the donation, the donor must recapture the deduction. However, an exception applies where the charity makes certain certifications of use of the character.{26 USC 170(e)(7)}

Assumption of Liability by Charity

A charity may assume a liability of the taxpayer in connection with the contribution. The amount assumed reduces the fair market value of the contribution. If the liability exceeds the value of the character, the taxpayer must recognize gain. Any interest on the liability attributable to periods before the contribution is not deductible by the taxpayer.{26 CFR 1.170A-3}

Prove It!

It is up to the taxpayer to prove the deduction if the IRS comes calling. The following records are required:

– A receipt from the charity suggesting what was contributed, the value, the name and address of the charity, and the charity’s employer ID number. This is required for contributions of cash or character. For contributions of character valued above $500, this information must be disclosed on Form 8283 filed with the taxpayer’s income tax return.

– A suitably detailed description of character contributed and its condition. For real character, this method something sufficiently specific to clarify the character (such as “house at 123 Easy Street, Niceville, GA”), but need not be the complete legal description. For personal character, the description need not clarify a particular article (like a serial number or CUSIP number) but should be complete enough to understand what the character is (such as form number or number and class of shares). observe: a means identification number is required for contributions of vehicles.

– An appraisal if the character is valued above $5,000. This must be attached to the taxpayers income tax return. The appraisal is not required for publicly traded securities (stocks and bonds). Both the charity and the appraiser MUST sign Form 8283, or the IRS will disallow the deduction.

– Records demonstrating the taxpayer’s basis in character if the deduction is limited based on basis. These include records of cost of goods produced or acquired.

– For meaningful contributions of tangible character, pictures help prove the condition of the character.

– For character (e.g., land, patents) with a non-negotiable title, a copy of the written contract transferring title.

Summary

Contribution of character can give you a meaningful income tax deduction. Where you contribute all rights to the character, the contribution is generally fully deductible, but your deductions may be limited based on your AGI. Deductions for contributions of inventory are generally limited to basis (cost). Where contributions are of less than all rights, additional limitations apply. Generally, all rights to personal character must pass to the charity to get a deduction, but deductions are allowed for portions of rights to real character. The taxpayer must prove the deduction, and must file Form 8283 for deductions in excess of $500. Appraisals are required for contributions of character valued above $5,000.

More information on getting deductions for contributions is obtainable in Income Tax in the USA 2013, ASIN B00BCSNOGG, obtainable at Amazon.com

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