What Tax Benefits Apply to Gifting In-Kind Donations?

In-kind donations refer to donations of goods or property rather than cash. These donations can provide significant tax benefits, including deductions for the fair market value of the donated items. Understanding the tax advantages of in-kind donations can help individuals maximize their charitable giving while minimizing their tax liability.

Tax Benefits of In-Kind Donations:

Charitable Contribution Deductions

Donating property or goods to a qualified charitable organization allows the donor to deduct the fair market value (FMV) of the items from their taxable income. This can include donations of items like clothing, vehicles, real estate, or artwork, as long as the organization is a registered 501(c)(3) nonprofit entity.

Capital Gains Tax Avoidance

One of the most significant tax benefits of donating in-kind is the avoidance of capital gains tax. If you donate appreciated property (such as real estate, stocks, or collectibles), you can avoid paying capital gains tax on the increase in value of the property. The property’s FMV is deductible instead of the original purchase price, which allows you to benefit from the appreciation without incurring taxes.

Itemized Deductions

To benefit from in-kind donation deductions, the donor must itemize their deductions on their tax return. This means that the value of the donated property is subtracted from the individual's total taxable income, which can reduce their overall tax liability. The IRS sets limits on how much can be deducted in any given year, typically up to 50% of the donor’s adjusted gross income (AGI), depending on the type of donation and organization.

Donation Receipts and Documentation

For in-kind donations to qualify for tax deductions, proper documentation is essential. Donors should obtain a receipt from the charitable organization showing the value and description of the donated property. For donations valued at over $500, donors need to file IRS Form 8283, and for donations over $5,000, a qualified appraisal may be required.

Donation of Appreciated Assets (Stocks, Bonds, etc.)

Donating appreciated stocks or bonds directly to a charity allows the donor to avoid paying capital gains tax on the appreciation. The donor can claim a deduction for the FMV of the stock on the donation date, and the charity can sell the stock without paying taxes on the capital gain. This is a highly effective strategy for high-net-worth individuals who have appreciated assets in their portfolio.

Non-Cash Donations of Goods

In-kind donations can also include non-cash items like furniture, clothing, or electronics. If these goods are donated to a nonprofit, the donor can deduct the fair market value of these items. It's important that these goods are in good condition and that the FMV is reasonably assessed. Generally, the donor cannot deduct more than the fair value of the item based on its condition.

Tax Savings for Businesses

Businesses can also receive tax benefits for in-kind donations. When a business donates property, goods, or services to a qualified nonprofit organization, it may be eligible for tax deductions similar to individuals, subject to IRS rules. In addition, businesses may be able to deduct the FMV of donated inventory or property.

Example:

Suppose an individual donates a piece of artwork that they purchased for $5,000 but is now valued at $15,000. If they donate the artwork to a qualified charity, they can deduct the fair market value of $15,000 from their taxable income. This not only provides a significant charitable contribution deduction but also avoids paying capital gains tax on the $10,000 appreciation in value. As long as they itemize their deductions and comply with IRS documentation requirements, they can significantly reduce their taxable income for the year.