Most mornings I listen to a few minutes of National Public Radio (NPR) while driving to work. If the changing leaves and the cool mornings weren’t enough to remind me that it is autumn, then NPR’s numerous “fall fund drive” announcements two weeks ago alerted me to the time of year. We have entered the giving season and if your mailbox is like mine, then you are receiving numerous donation and pledge requests.
While a main motivation to give should be a desire to support a cause that you are passionate about, one should not overlook the tax ramifications of the way in which a gift is made.
Writing a check is likely the first method that comes to mind when giving to a charity, but let’s look at a scenario that illustrates the tax advantage of gifting appreciated securities (i.e. stock or mutual funds) rather than gifting cash.
Ken and Alice would like to donate $10,000 to their church and they are in the 33% federal marginal tax bracket. Option one is to sell $10,000 worth of appreciated stock in their brokerage account and then write a check to the church using the proceeds. They purchased the stock for $2,000 and because it was bought more than a year ago they will have a long term capital gain of $8,000 on the sale, which will be subject to 15% capital gains tax. This means they will pay capital gains taxes of $1,200 on this transaction, while receiving a charitable income tax deduction of $3,300. This option results in a net out of pocket cost of $7,900 (see Option 1 in table below.)
Option two is to gift the stock directly to the church and let them sell it. The church does not pay capital gains taxes since it is a qualified charitable organization. Using this technique, Ken and Alice will receive the same charitable deduction as before, which results in $3,300 income tax savings. However, they will avoid the $1,200 capital gains tax, which lowers the net out of pocket cost to only $6,700 (see Option 2 in table.)
|Option 1. Gifting Cash||Option 2. Gifting Securities (i.e. stock or mutual funds)|
|Gift Amount/Deduction||$10,000||Gift Amount/Deduction||$10,000|
|Capital Gains Tax||+ $1,200||Capital Gains Tax||+ $0|
|Income Tax Savings||– $3,300||Income Tax Savings||– $3,300|
|Net Out of Pocket Cost||= $7,900||Net Out of Pocket Cost||= $6,700|
Another gifting technique is to use a donor advised fund, also called a charitable gift fund. This may be a good option for someone who wants a large charitable deduction in the current year, but who presently might not have specific charities in mind or who wants to dole out the dollars to charities in subsequent years. A donor advised fund basically works by having a person make an irrevocable tax-deductible gift to the fund–appreciated securities are acceptable gifts into the fund. The donor receives an immediate tax deduction and then when ready, s/he requests that the donor advised fund distribute grants to the desired charities. Because the donor receives the tax deduction for the year the gift is made into the donor advised fund, no tax deduction is available when grants are made out of the fund.
I recently heard a story about a family’s Thanksgiving tradition that involved each family member selecting a charity to which they wanted to give. Before dinner the each family member would share with one another the charity they selected and why they chose that particular organization. When actually making the gifts, the parents together with the children would submit the grant request to the parent’s donor advised fund. This family was charitably inclined and the parents felt this was a good way to pass along their value of giving in a tangible, thoughtful and responsible way.
At Woodward Financial Advisors we are well prepared for the upcoming season having used donor advised funds and security gifting techniques to help our clients make the most of their financial generosity. Please contact us (or your tax advisor) if you have questions about gifting strategies as some restrictions may apply, such as tax deduction limit and the type of organization that may qualify.
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