People frequently ask me about taking a tax deduction for their charitable donation to the church or to other charities. Most people have been confused about what is and is not deductible since the changes resulting from passage of the Pension Protection Act of 2006. Several factors determine how much can be deducted for a charitable donation:

— Whether the charity is approved by the IRS (most churches are approved) — The type of charitable donation determines the amount you can deduct — There have been changes regarding the documentation you must have — There are new penalties if you over-value your charitable donation — There rules about how you deliver the gift and when it is considered a completed gift

The purpose of this article is to outline the deduction allowed for the most common types of charitable donations.

Cash

This is the most straightforward. Whatever you give, you can claim as a charitable donation and deduction. However, each category of gift has its own limitation based on your adjusted gross income (AGI) and the type of charity (public or private family foundations). The limit for a charitable contribution of cash to a public charity is 50% of AGI. Churches are public charities.

Charitable Donation of Bonds, Real Estate, Inventory or Stock

If the asset has been held for more than a year, the charitable donation is the fair market value. However, for real estate, there are some situations that may limit the deduction to the cost basis.

If the asset has been held for less than a year, it would produce ordinary income, not a capital gain, if sold. Therefore, the charitable donation is limited to the cost basis. Other examples of deductions limited to the cost basis are works of art donated by the artist and inventory.

If I own a toy store and donate 100 toys from my inventory to an annual toy drive for children, my tax deduction for this charitable donation would be based on my original cost for the toys instead of their retail value.

Series E and EE Bonds

By law, Series E and EE bonds cannot be transferred to my church or other charity during my lifetime. If I want to make my bonds a charitable donation, I must first cash them. Then I must pay tax on the gain (interest paid). Then I can contribute whatever amount is left to the church or other charity.

Planes, Trains and Automobiles

New rules about charitable donation of automobiles became effective on January 1, 2005. Gifts of cars are a major source of confusion for taxpayers.

If the church or other charitable organization fixes up the vehicle and uses it or gives it to a needy individual, the fair market value of the vehicle is the deduction basis for the charitable donation. If, however, the charity cant use the vehicle and sells it, the tax deduction basis is the lower of the fair market value or the price they get for the vehicle.

Disclaimer

I am not a tax authority. Before making a charitable donation and taking a tax deduction for it, you should discuss the planned gift with both the church or other charity and a tax professional. This enables you to make the most of your donation.

Robert D. Cavanaugh, CLU is a 39-year veteran of the life insurance, financial and estate planning industry. He publishes The Smart Giver, a planned giving educational series which teaches techniques to increase income and reduce taxes while simultaneously helping churches and non-profits. More information about how different kinds of gifts can result in a charitable donation can be found on his blog.