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Gifting Appreciated Property – Benefits and Savings of Donating Stock

With the end of a tax year just around the corner, the time is right to review opportunities to deduct charitable contributions. Consider the benefits of gifts of appreciated property. Generally, a gift of appreciated property (such as stock) to a qualified charitable organization is deductible to the extent of the fair market value of the property at the time of the gift. The appreciation in the property escapes tax.
Assume you wish to make a significant gift and you own stock that was acquired many years ago at a cost of $10,000, which is now worth $50,000. You could sell the stock and write a check to the organization for the amount of the after-tax proceeds, or you could make a gift of the stock itself. By selling the stock, you will have to pay 20% tax on the $40,000 capital gain which would equal $8000. Therefore, after paying the taxes you have $42,000 to give the charity and you will get a tax savings of $16,800 (40% of $42,000).

However, if you donate the stock at FMV of $50,000 the charity ends up with the full $50,000 and you get a tax saving of $20,000 (40% of $50,000). The net result is that the charity gets $8000 more, and you get the greater tax savings.

A bargain sale of appreciated property can also provide a tax benefit. The charitable deduction is determined as the difference between the selling price and the fair market value of the property. The taxable gain is determined by prorating the basis in the property between the portion “sold” and the portion “gifted.”
The deduction for contributions of appreciated property by an individual is limited to 30% of adjusted gross income for the year. Certain exceptions apply to the ability to deduct the fair market value of property. For example, a contribution of tangible personal property is deductible only to the extent of the taxpayer’s basis in the property unless the recipient uses the property in furtherance of its exempt purpose.
Deducting appreciated property can be a win-win and should be considered as a valuable tax-saving opportunity.

Accrual by C corporation. Accrual basis Subchapter C corporations may accelerate the deduction for contributions made after year-end. The board of directors must authorize the contribution during the tax year, and the payment must be made by March 15 of the following year for calendar year corporations. The tax return must include a declaration signed by a principal officer and a copy of the board resolution.

Debt, Debt and Taxes Too

Got debt. Got debt relief. Walked away. Now what? Generally, if you borrow money from a commercial lender and the lender later cancels or forgives either a portion or all of the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. There are some exceptions.

Debts discharged through bankruptcy are not considered taxable income.

Generally if you are insolvent (the total of all your liabilities exceeds the fair market value of all your assets) you do not have to include the canceled debt into income to the extent that you were insolvent immediately before the cancellation. There are certain rules that apply with regards to the insolvency exclusion.

For the years 2007 through 2012, you can exclude up to $2 million of discharged indebtedness ($1 million if married filing separately) from income if it is qualified principal residence indebtedness. If you own more than one home, determination of your principal residence is based on the circumstances that are particular to your situation. Qualified principal residence debt is the debt that is used to buy, build or make substantial improvements to your principal residence.

If part of the principal resident debt was not related to the acquisition, construction or improvement of your home, such as paying off a credit card loan, that unrelated portion of the debt would not qualify under this exclusion. If you exclude canceled qualified principal residence indebtedness from income and you continue to own the property, then you must reduce the basis of the residence (but not below zero) by the amount of the canceled qualified indebtedness excluded from income. This reduction in basis generally follows other types of cancellation due to bankruptcy or insolvency.

If the seller of a property reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. Instead the reduction of debt is treated as a purchase price adjustment and reduces your basis in the property.

If the property is not your primary residence and you do not meet one of the various exceptions then upon foreclosure, repossession or abandonment you may realize income or loss. The calculation is somewhat similar to a sale or exchange, but is dependent upon several factors.

If you are in a situation that requires further evaluation please contact your HLB Gross Collins, P.C. representative.

Cash for Clunkers

Bill to Entice Trade-In of Gas Guzzlers

President Obama has signed a “cash-for-clunkers” bill. Consumers will be eligible for tax-free vouchers of either $3,500 or $4,500 toward the purchase or lease of a new, more fuel-efficient vehicle. Vouchers will be applied by participating dealers, reducing the purchase price and the government will reimburse dealers. Congress appropriated $1 billion for the program, which will begin on July 1, 2009 and end on November 1, 2009. The manufacturer’s suggested retail price for the new fuel-efficient vehicle cannot exceed $45,000. Domestic and foreign vehicles are eligible for the program.

The program is designed to remove gas guzzling, environmentally outdated automobiles from the roads as well as boost sales for economically depressed automobile dealers. The bill limits the number of vouchers to one per customer, including joint registered owners of a single eligible trade-in vehicle, and requires a dealer to certify that he will transfer the vehicle and its title to an entity that will ensure that the vehicle will be crushed or shredded within the program period, and has not been, and will not be, sold, leased, exchanged, or otherwise disposed of for use as an automobile.

 

Generally, a “clunker” must have a combined city/highway fuel economy of 18 miles per gallon or less. The vehicle must also be drivable, continuously registered and insured to the same owner for one year before trade-in, and not more than 25 years old. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 mpg.

 

Certain vehicles are divided into 3 “truck” categories:

  • A category 1 truck is a non-passenger automobile. This category includes sport utility vehicles (SUVs), small and medium pickup trucks and small and medium passenger and cargo vans.
  • A category 2 truck is a large van or a large pickup truck, based upon the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). Note: some pickup trucks and cargo vans exceeding these thresholds are treated as category 3 trucks instead of category 2 trucks.
  • A category 3 truck is a “work truck” and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (those with cargo beds 72 inches or more in length) and very large cargo vans.

 

 

For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 mpg. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 mpg. Category 3 trucks have no minimum fuel economy requirement; however, there are special requirements that apply to the purchase of category 3 vehicles. The credit for a work truck is limited to $3,500. Furthermore only 7.5% of the funds were allocated towards work trucks. Once that is reached no more credits will be available for work trucks.

 

 

More information is available at www.cars.gov.

Making Work Pay

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit will be computed on the employee’s 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

Incentive for First Time Homebuyers

House Bill 261

On May 11, Georgia Governor Sonny Perdue signed House Bill 261 allowing  a tax credit for homes purchased between June 1, 2009 and November 30, 2009. The credit is the lesser of $1,800 or 1.2 percent of the purchase price and it is not limited to first time homebuyers.

To qualify for this credit, the home:

  • Must have been for sale prior to May 11, 2009 and still be held for sale, or
  • Must have been in default or already foreclosed upon and held by a bank or mortgage company on or before March 1, 2009.

This credit can be used in addition to the First Time Homebuyer credit, allowing first time home buyers in Georgia potential combined credits of up to $9,800.

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