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Charitable Gift Annuities

Current Federal tax code allows for charitable contributions to be deducted on individual tax returns at fair market value when given as gifts to qualifying charitable organizations. The gifts may be cash or other property but are dependent on an individual's current tax situation as there may be certain limitations or other requirements.

It is not uncommon for individuals to donate stock of publicly traded companies or real estate to qualifying charitable organizations. Why would anyone give such valuable property to an organization? Because the amount of the gift when itemized on a Federal tax return is based on its fair market value. This is a very important concept to understand and can have significant tax implications for individuals or businesses.

Let's say for example an individual donates 100 shares of a publicly traded company to a qualifying charitable organization and those shares are valued at $500 each so the total gift is $50,000. More than likely it did not cost the individual $50,000 of their money. Normally such a gift would be purchased years ago for, in this example, $100 and therefore the cost basis would be $10,000. If this individual gifts the $50,000 worth of stock to a qualifying charitable organization there are numerous benefits.

Not only does the individual avoided paying capital gains on $40,000 at a rate of between 15 or 20% which would be between $6,000 and $8,000 but they also get to use the fair market value of $50,000 to lower their adjusted gross income and subsequently lower their overall tax burden which can save additional thousands of dollars. So for a $50,000 gift they save $8,000 in possible capital gains taxes but also save possibly thousands more from being in a lower tax bracket.

This tax rule was specifically created to encourage charitable contributions from wealthy individuals which benefits not only those individuals but also the qualifying organizations to which the gifts are made. There are however limitations and qualifications placed on this type of deduction which must be followed as outlined in the tax code.

Tax deductions taken on gifts such as appreciated stock or real estate made to qualifying charitable organizations is limited to 30% of adjusted gross income. Cash gifts on the other hand are limited to 50% of adjusted gross income to those same organizations. Any excess tax benefit which cannot be utilized in the current tax year can be carried over for up to five additional tax years. There's also a minimum requirement of 12 months of prior ownership of any appreciated stock or real estate in order to use the tax deduction for the underlying assets fair market value.

Tax related issues can be complicated and any charitable donations or gifts should only be made to qualified organizations. It is also highly recommended to consult with an accountant or tax attorney to make sure all stipulations are being met so that tax penalties or fees are not incurred when making charitable contributions.