Last year at this time I wrote an article about tax deadlines and the penalties for not filing or not paying on time. This year I want to talk in detail about one of our most innovative and useful strategies that can help clients to save on their taxes.
This strategy is leveraging charitable deductions. Most everyone is familiar with the idea of taking a tax deduction for cash donations to charitable organizations. A common example is money donated to your church, school, or favorite non-profit organization—(I like Hawaii Public Radio). In general, this deduction is limited to a maximum of 50% of your adjusted gross income (“AGI”) for the year. If the donation is made to certain charitable organizations, such as veteran’s organizations, fraternal societies, and private nonoperating foundations, you may only deduct up to 30% of your AGI.
However, not many people realize that they can take a charitable deduction for unreimbursed out-of-pocket expenses incurred when donating their services, and also for noncash contributions. To deduct out-of-pocket expenses, you must keep records proving how much you spent. If any separate expense is $250 or more, you must get an acknowledgment from the organization providing: (i) a description of the services you provided, (ii) a statement of whether or not the organization provided you with any goods or services to reimburse you, together with the value of such goods or services, if any; and (iii) a statement that the only benefit you received was an intangible religious benefit, if that was the case. You can also deduct 14 cents a mile if you have an adequate record of miles driven for charitable purposes.
However, the biggest advantage comes when donating appreciated property that has been held for investment or personal use (not property used in your trade or business). If you purchased publicly traded stocks at least one year ago which have now gone up in value, instead of selling the stock and paying long-term capital gains tax on the profit, you can donate the appreciated stock to a charitable organization and take a tax deduction for the full fair market value of the stock at the time of the donation without paying any tax on the increased value! Don’t underestimate the power of this technique!
Besides stocks, you may also donate real property or tangible personal property such as jewelry, cars, stamps, coins, or baseball card collections, and furniture used for personal purposes. There are other complex rules, limitations, and regulations that apply to the donation of these noncash assets (such as a 20% of AGI rule and two different 30% of AGI rules). When making this type of donation, be sure to seek the help of a tax advisor experienced in this area of tax law to avoid any costly mistakes. The IRS can charge you a 20% or 40% underpayment penalty if you don’t claim the deduction correctly and underpay your taxes on account of it.
Having said that, let’s look at an example of a client who achieved great success using this technique. The client, with our help, purchased a large amount of baseball cards and other sports memorabilia for $10,000. One year later, the appraised value of the items was $60,000. The client donated the appreciated property to a charitable organization which allowed him under IRS rules to take a charitable deduction of up to $60,000 over time for this donation. This donation fell under the 20% of AGI rule and the client’s adjusted gross income that year was $75,000. So, the client took the maximum 20% deduction that year, which was $15,000. The rest of the unused portion of the $60,000 deduction ($45,000) got carried over to be used in future tax years (for up to a maximum of 5 years). Because the client was in the 25% federal tax bracket, this saved him $3,750 in Federal income taxes and $1,238 in Hawaii state income taxes for a combined tax benefit of $4,988 actual dollars saved that year…and each year after that for a total of 4 years! Altogether, the client saved almost $20,000 in taxes giving him a 100% return on his investment of $10,000.
Remember, every year after doing your taxes is a great time to see your estate planning attorney and review your estate plan to make sure that your documents are up to date and current with all the changes in the law. As an added benefit, you just might learn about a new strategy to save you thousands of dollars in taxes.
© OKURA & ASSOCIATES, 2015