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Charitable donations can be more than cash. A growing number of people are giving noncash assets, such as bitcoin, life insurance policies and restricted stock, to their favorite causes.
Fidelity Charitable, a donor-advised fund and the nation's second-largest grantmaker, reports that people gave a record $796 million of nonpublicly traded assets to charities last year.
Donor-advised funds allow people to take an immediate tax deduction on their donations, invest the assets tax-free and grant the value of the assets to qualified charities at the time of their choosing.
"Donor-advised funds are a great way to give nonpublicly traded assets. Some charities will accept such assets directly, but only if they have the requisite expertise in-house," said Juan Ros, a certified financial planner and vice president for financial planning and philanthropy at Lamia Financial Group in Thousand Oaks, California.
Gifting appreciated assets comes with a double tax benefit: "Not only do you get to deduct the fair market value of the gift as a charitable deduction, but you also get to avoid paying tax on the unrealized gain of the donated property," said Chad Hamilton, a CFP in Denver who specializes in philanthropy.
For example, let's say a business owner makes a deal to sell his company and gifts shares of his stock worth $50,000 to a donor-advised fund. The business owner would avoid taxation on that $50,000 when the company is sold.
Assuming a cost basis of zero and an effective tax rate of 30 percent, a combination of long-term capital gains, state income tax and Medicare surtax, that is a long-term capital gains tax savings of $15,000, Hamilton said. Plus, that $50,000 gift is available to be claimed as a itemized charitable tax deduction.
Or let's say you want to unload bitcoin after its rapid rise this year. If you donate the bitcoin instead of selling it, you can take a charitable deduction for the fair market value on the day you give it away.
Another bonus: You'll also avoid capital gains taxes on the increase in value over time, which you would pay if you sold the bitcoin and then gave the charity the cash from the sale.
You can only deduct the fair market value if you held the bitcoin for more than a year before giving it away. If you've held it for less than a year, your deduction is limited to your cost basis, or what you paid for the digital currency, not its current value.
"Often people have appreciated assets, like stock, business interest or real estate, but they don't think of gifting those and instead just give cash," Hamilton said.
Under current tax law, you can deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you can deduct up to 50 percent of your adjusted gross income in charitable contributions, but deductions can be limited to 20 to 30 percent of your income in some cases.
Tax deductions for noncash donations can be tricky. If the donor is claiming a deduction in excess of $5,000 for a noncash gift, the IRS requires a "qualified appraisal" to substantiate the value, Ros said.
Appraisals for nonpublicly traded assets can be expensive, but not getting an appraisal could mean missing out on the deduction. "The IRS has very specific rules for what constitutes a qualified appraisal," Ros said.
The charitable deduction has been a part of the U.S. tax code for a century, but lawmakers and the Trump administration have proposed making changes. Here's a comparison of how charitable deductions are treated under current law, Trump's latest tax plan, the House Republicans' blueprint and the 2014 Tax Reform Act proposed by former House Ways and Means Committee Chairman Dave Camp:
Whatever happens, the advantage of many donor-advised funds is that they have the technical expertise to do the qualified appraisal without running afoul of the IRS. However, these funds are not always the best option for every asset.
"Some types of noncash assets, like artwork, will receive less favorable charitable benefits when donated to a [donor-advised fund] and should be donated to a charity that will use the asset for operations," said Arlene Cogen, a CFP and philanthropy consultant in Portland, Oregon.
For example, with artwork, donors should consider giving it to a museum for a better tax deduction.
"The biggest mistake clients make when donating noncash assets is the failure to understand the full implications of the gift," Cogen said.