Broadly speaking, donors get the largest benefit for their deductible buck by giving to a public charity rather than a private foundation. Donor-advised funds, which are managed by a community foundation, non-profit organization or financial services institution, are also eligible for the most generous deductibility limits. You may claim a deduction on the contribution of up to 50% of adjusted gross income, or AGI, for cash donations, and 30% of AGI for gifts of long-term appreciated assets such as publicly traded securities, restricted stock, or real estate.

By comparison, when gifting to a private foundation, donors are limited to 30% of AGI for cash gifts and 20% of AGI for gifts of long-term appreciated assets. In both cases, donors can “carry over” their deduction in each of the subsequent five years if the gift exceeds these annual limits.

Capturing the Benefits of Record-Low Interest Rates

Interest rates are at 45-year lows and should remain at low levels through 2004, if not longer. That means it’s a good time to establish a charitable lead trust, or CLT. These vehicles are annuity trusts in which the charity receives a fixed amount of income from the donated assets in the trust for a set period of time, after which the principle is transferred to the donor’s heirs. The beauty of using this vehicle now is that a donor’s heirs will pay gift taxes on the anticipated value of the trust at the so-called applicable federal rate, which is based on current, low interest rates.

If you seek a tax deduction and own assets that have appreciated substantially in value, consider using them to fund a charitable remainder trust, or CRT. This charitable vehicle provides donors with an income stream for life. Donors avoid capital gains taxes on the sale of the appreciated assets and earn a tax deduction this year. Upon the death of the donor, the trust remainder is distributed to a named charitable organization. “CRT’s are popular this year among investors who have done well in such vehicles as value stocks or real estate,” says Rande Spiegelman, vice president of financial planning, Schwab Center for Investment Research.

Giving Strategies for Business Owners

Business owners can employ a variety of creative tax-saving charitable strategies. One approach at year’s end is to donate appreciated inventory or other ordinary income property. You can take a tax deduction on the fair market value of the property if it has depreciated. On the other hand, if the property has appreciated, you can deduct the fair market value minus the amount that would be short-term capital gain – or the basis.
Keep in mind that you should be prepared to show the IRS that your gift was indeed ordinary income; that is, you would have sold the property and kept the proceeds as a gain. Your tax advisor can help you if IRS questions arise.

Business owners and investors alike who are looking to raise year-end cash by liquidating closely held assets—for example, S corporation shares or limited partnership units—may be able to reduce any capital gains tax burden by donating a portion to charity. But watch out for the IRS’s assignment of income rule, says charitable giving specialist Jill Dodd, a tax attorney with Steefel, Levitt & Weiss in San Francisco. Dodd has seen difficulties arise when owners or partners in such entities try to donate a portion of their equity stake while also negotiating to sell their share of the physical assets. Donors may ultimately bear the capital gains tax burden they are seeking to avoid when the charity unloads the donated shares. “The IRS decides, case by case, how far along in the sale is too far along,” says Dodd.

Similar such catches arise with donations of art and collectibles. For instance, the IRS will limit the deduction to the cost basis rather than the market value unless donors can prove that recipient organizations are using the works to pursue their charitable mission. “I had a client who donated artwork that went to the recovery room in a hospital,” says Dodd. “The IRS challenged the deduction, but ultimately allowed it on the grounds that art helps patients recover.”

The moral of the story is clear: consult a tax advisor when looking to maximize the tax benefits of your own year-end charitable giving strategies.