Many people save thousands of tax dollars by donating to their favorite church or charity, but miss out on thousands more. The charitable deduction is a well-known tax break. A little-known stratagem can dramatically increase its impact. This is completely legal and IRS approved. It worked under Obama, and it still works under Trump. It can save large donors millions, but smaller donors can still benefit.
This huge break applies when a person sells an asset that has gone up in value and makes a charitable donation. The asset can be a house, stock, other property, or even a business. Now, if the person sells the property to make a donation, he makes a taxable profit. This profit is then cancelled out when he makes a donation, subject to certain rules. As an example, suppose he has an asset that he paid $10,000 dollars for and he sells it for $100,000. He now has $90,000 taxable income on the profit of the sale. He donates $100,000. Now has a charitable deduction of $100,000. Assuming he has sufficient income to support that large a donation, he winds up with his taxable income $10,000 less than when he made the sale. Not bad.
But get this. Suppose he donates the asset and the buyer buys it from the charitable organization. He has no income from the sale and a $100,000 donation. If his taxable income is enough to support the donation, HIS TAXABLE INCOME IS $100,000 LESS THAN WHEN HE MADE THE DONATION.
Now, there are a lot of rules and the IRS does not always make things simple. I am not going into all the fine print here. I recommend before you make a large donation counting on a tax savings, check this out with a trusted tax expert. You do not want to discover after-the-fact that it is disqualified by some regulation.
This can apply to many situations. Suppose you started and built a successful business. It started out with zero value and is now worth $2 million. You can sell it, make a $2 million profit and make a $2 million dollar donation. However, part of the donation may be disallowed in the current year if you do not have enough income. You could wind up with a tax bill! And no business!
But if you donated the business, and the buyer bought it from the charitable organization, you have no profit and a $2 million dollar donation to offset your taxable income. If you can’t use it all in current year, you can roll it over to the next.
What if you do not want to give the whole business away? Maybe you want to have some money to live on. OK. Donate 20% and the non-profit sells that. You sell 80% Non-profit gets $400,000. You get $1.6 million dollars. Taking the donation value of $400,000 off, and you get taxed on $1.2 million of the $1.6 million you made off the sale!
If you would rather donate to your church or a charity, rather than pay the US government, applying this stratagem may work well for you. Maybe you feel your church or charity will do more good with the money than the federal government. I feel that way myself. I hope this article helps make it easier for those who wish to donate to do so.
What to do?
If you have any questions or need any tax assistance contact GuardDog Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.