Town Talk Features

Assets & Answers: 12.5.18

What is the best way to gift collection pieces to charity, and how do you treat them from a tax standpoint?

kathy perry, director of trust and estate services, bmo private bank 
Many collectors prefer to donate pieces rather than selling them, which will trigger capital gains at the taxpayer’s ordinary income rate, with a cap of 28 percent—considerably higher than the 15 to 20 percent rate on the sale of a stock. For pieces donated to charity auctions, the collector only can deduct the cost basis of the item, which is the amount he or she paid for it, not the current fair market value.

The rules differ when a collector donates to the charity itself. First, in order to deduct the fair market value of the donated item, the organization must be a qualified public charity with a 501(c)(3) designation. For a donation to a private foundation, the collector only can deduct his cost basis. Second, the gift must relate to the purpose and function of the charity in order for the donor to claim a deduction of fair market value. For instance, a painting donated to an art museum is related to the museum’s function; a painting donated to an animal shelter to be sold does not, and a deduction only can be claimed for the painting’s cost basis. There also are complex rules about appraisals and the total amount of deductions that can be claimed relative to the taxpayer’s adjusted gross income for the year.

The Tax Cuts and Jobs Act of 2017 increased the standard deduction amount to $12,000 per individual and $24,000 per couple; Forbes predicts that 21 million taxpayers will stop itemizing their deductions as a result. One solution for charitable donations is to bunch them into a single calendar year to allow itemizing to make sense.

A separate discussion also is warranted on the use of a charitable remainder trust, which allows the donor to avoid capital gains, receive income from the trust and claim a tax deduction. The donor should consult his or her adviser before making any significant decisions that affect income and estate taxation and financial planning.

tom bassett, vice president & tax manager east region, commerce trust company
If you have collectibles that have appreciated in value and that you’ve held for more than a year, you can claim a full fair market value deduction when they’re donated to charity. You may need to consult a qualified appraiser. (Note: A charity is not one.) If the assets have declined in value, you should consider selling them, as your donation will be limited to the lower fair market value. And if you’ve held the assets for less than a year, your donation will be limited to your cost basis, meaning you won’t be able to claim a higher fair market value.

If you donate appreciated property to a public charity, your deduction will be limited to 30 percent of your adjusted gross income. If you donate to a private foundation, it will be limited to 20 percent. If the charity is not going to use the asset or puts it to an unrelated use, your deduction may be limited to your cost basis.

If your non-cash charity contribution is over $500, you must attach IRS Form 8283 to your tax return. Other requirements may exist at the following thresholds: $5,000, $20,000 and $500,000. In all cases, consult your tax adviser before making non-cash charitable contributions.