The utilization of tax credits and tax deductions is one of the most effective ways to reduce taxable income and save tax dollars. However, in spite of their usefulness, many tax breaks are underutilized due to their obscurity. Even once they are identified, eligibility can sometimes be difficult to document. As a result, many taxpayers fail to receive the full tax advantage offered by some of the lesser known tax credits and tax deductions, two of which are highlighted below:
Conservation Easement Tax Deductions
The Conservation Easement Tax Deduction is a tax incentive that was created for the purpose of protecting land from unwanted development. An enhanced version of the law that established this tax break, passed in 2015, allows taxpayers who donate such parcels of land to claim a tax deduction equal to as much as 50% of their adjusted gross income for any given year. It comes with the additional provision that land donors can carry amounts that exceed this ceiling forward for up to 15 years from the date of the initial contribution. This same law gives farmers and ranchers the ability for deduct up to 100% of their annual income for conservation easement contributions with the same 15-year carryforward stipulation.
Although the potential tax savings are significant, this tax incentive is nevertheless often overlooked due to that fact that owners of vacant land frequently do not have sufficient taxable income to warrant its use. What many taxpayers fail to realize is that there are conservation easement tax strategies in place that allow partners who are not original landowners to receive the tax benefits associated with conservation easement donations. This being the case, non-landowners should investigate the possibility of using charitable land donations to offset sizable taxable transactions and periods of high income.
Charitable Gifts of Appreciated Property
A Charitable Gift of Appreciated Property is a second tax break that is very often underutilized. For high income taxpayers as well as those facing the tax consequences of a sizable taxable transaction, a charitable contribution of appreciated property can offer a significant tax benefit. In general, a taxpayer who makes such a donation receives a charitable tax deduction equal to the current market value of the donated asset with the added benefit of avoiding paying capital gains taxes on any appreciated value of the contribution if it was sold for a profit.
Although appreciated investments are probably the most common asset donated to charity, such contributions can also come in the form of land or real estate, among other things. Even when the profits from the sale of such items are taxed at more favorable long term capital gains rates, combined state and federal income taxes can amount to as much as 35% of the sale price. This makes donating such assets to charity a desirable tax planning strategy for certain types of taxpayers. In addition to the tax benefits received by the donor, a Charitable Gift of Appreciated Property provides the charitable recipient of the donation with all of the benefits associated with the donated asset.
Conservation Easement Deductions and Charitable Gifts of Appreciated Property are just two of many lesser known tax incentives that can provide a significant tax advantage to a taxpayer who meets the required quantification criteria. This being the case, a prudent taxpayer is always wise look at all possible ways to reduce taxable income and save valuables tax dollars. However, since many tax credits and tax deductions are obscure and complicated to decipher, taking full advantage of available tax breaks is often best accomplished with the help of a qualified tax professional.
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