Smart gift planning combines charitable intent with cost-efficient planning techniques. Of critical importance is the kind of asset used to fund the gift. Usually, Long-term appreciated property can generate the most favorable tax benefits. Reason: Gifts of such property, in most cases, provide a double benefit: a charitable deduction for the full fair-market value of the property, plus avoidance of any potential capital-gain tax.
When donors think of appreciated property, securities such as stocks probably come to mind most often. Gifts of such assets clearly demonstrate the double benefit of contributing long-term appreciated property.
Charitable deduction. A donor who contributes long-term capital-gain securities or real estate (i.e., property held for more than one year) earns a charitable deduction equal to the property's full fair-market value (FMV). Note: Gifts of short-term capital-gain property do not provide the same tax benefits.
A donor can deduct-in the year of the gift-the full fair-market value of the long-term appreciated property, subject to a limit of 30% of his or her adjusted gross income (AGI). Any excess can be carried forward for up to five year.
Example: Todd owns securities with an FMV of $30,000; the stock was purchased several years ago for $20,000. If he contributes the securities to charity, he will receive a charitable income-tax deduction of $30,000, saving him $10,500 in his 35% tax bracket ($30,000 x 35%). The income-tax savings alone will reduce the cost of his gift to $19,500 ($30,000 - $10,500). Due to IRS limits, Todd would only be able to use $24,000 in the current year ($80,000 x 30%). The remaining $6,000 is not lost, but carries over to the following year and is deducted then.
Even better... Avoid Capital-Gain: A donor who makes an outright gift of long-term securities or real estate avoids paying capital-gain tax on the property's appreciation. With capital gain on these assets taxed up to 15%, a donor can realize substantial savings by contributing the property rather than selling it and contributing the after-tax proceeds.
Example: Remember Todd? He bought the stock for $20,000 and now it is worth $30,000, a $10,000 increase. So Todd would pay 15% tax on that $10,000. The question for Todd is not how much he will give, he knows he wants to give $30,000. Now he wants to know how he should give. Should he: sell the stock, contribute the stock, or just make out a check for $30,000 cash. See illustration below for a comparison.
A cash gift will save him $10,500 in income taxes ($30,000 x 35%). Effectively, this means that he can give $30,000 for a cost to him of $19,500.
If he chooses to sell the stock, he will owe a capital-gain tax of $1,500 (15% of the $10,000 gain). This will leave him with $28,500 to contribute (ignoring any sales commission). He will save $9,975 in taxes in his tax bracket ($28,500 x 35%). At the end of the day, he only gets a gift receipt for $28,500 and the double wammy is that the cost of the gift will be $20,025 ($28,500 + $1,500 - $9,975). He gave less to the charity but spent more to do it.
But if he contributes the stock, his charitable deduction will be the full market value of $30,000, saving him $10,500 in income taxes ($30,000 x 35%). In addition, he avoids paying the $1,500 tax on the appreciation. The combined tax savings reduce the net cost of a direct gift of the stock to $18,000 ($30,000 - $10,500 - $1,500). Now, he will get the full deduction and is able to give it in a way that saves him an additional $1,500 over the straight cash gift.
Todd's Giving Options
Please note this example is for illustration purposes only. You should contact your tax advisor and discuss how gifts of appreciated assets would benefit you. If you do not currently work with a tax advisor, you can contact Dan Kittell or Steve Reed at 317-549-3091. Both are professional tax preparers and members of the Freedom Board of Directors.