Most doctors know that contributions to charitable organizations qualify as tax deductions. But what many don't know is that through a bit of preplanning, charitable contributions can provide additional benefits beyond the traditional deduction.
A check written to an IRC §501(c)(3) organization qualifies as an itemized deduction on a doctor's individual tax return. Unfortunately, doctors in high income brackets are subject to itemized deduction phaseouts, known as the Pease limitation. Noncash contributions also fall prey to this limitation. With the loss of these deductions, it is essential to plan for the following enhancements to charitable deductions as part of tax planning.
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Strategies to consider when making a donation
Appreciated stock-By donating appreciated stock directly to a charitable organization, a doctor can glean additional tax benefits. The fair market value of a stock will be deducted as an itemized deduction on the tax return, much as a check to the organization would. In addition, the gains in the stock will not be subject to long-term capital gains tax, which are 15% to 20%, or to the 3.8% net investment tax on the growth.
Donor-advised funds-Donor-advised funds have become popular in recent years and provide a more long-term approach for those who wish to contribute appreciated stock. A doctor can create a donor-advised fund through an intermediary. This can be done easily through various organizations and broker-related donor-advised fund organizations. Thereafter, the intermediary facilitates the contribution of stock from the doctor's portfolio. The doctor receives a deduction in the amount of the fair market value of the stock contributed in the year of the contribution. Amounts not directed to charitable entities by the fund in the year of the contribution are still available for future distributions to charities, subject to approval by the fund. In essence, this allows the doctor to take the deduction in an earlier year while making contributions in future years. This can be an especially useful tool in years with a large spike in income, such as the year a doctor sells his or her practice. In this circumstance, the charitable contribution helps to offset the increase in income in the year of the sale. Going into retirement, it allows the doctor to continue to provide funds to his or her favorite organizations each year.
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Conservation easement-If a doctor holds land, such as a hunting preserve, timberland, farm, ranch, or lakefront property, and would like to protect it from future development, then a donation to a qualified land conservation organization can create restrictions on the property and result in a great tax benefit for the owner. A conservation easement is a legal agreement between the landowner and qualified land conservation organization that restricts residential and commercial development. It is important to note this is not a sale of the land; the doctor can continue to use it for personal purposes as long as the conservation easement restrictions are not violated.
Also, the property can still be sold in the future, subject to restrictions from the easement. From a tax perspective, the doctor receives a deduction equal to the difference between the fair market value of the land before and after the easement. The contribution is limited to 30% of the doctor's adjusted gross income (AGI), but any unused contribution can be carried forward for up to 15 years, creating additional deductions and peace of mind for the landowner. The IRS closely scrutinizes conservation easements, so it is important to adhere to detailed IRS regulations or risk losing the deduction.
John K. McGill, JD, MBA, CPA, provides tax and business planning services exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company, Inc., a member of the McGill & Hill Group, LLC. Holden Sours, CPA, provides accounting and CPA services through Elliott Davis Decosimo, PLLC, an affiliate of the McGill & Hill Group, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com for more information.
