"Have I got a deal for you!"
- Jeff Chinery, CFP(r) National Planning Group a division of Ronald Blue & Co., LLC
- 2004 29 Apr
Usually when you hear this statement, it is time to pack your things and run. Time and time again we are presented with the "financial opportunity of a lifetime" as long as we sign up within 24 hours, of course.
Well, believe it or not there is one strategy that you can employ when it comes to charitable giving that is the ultimate win-win situation. Giving appreciated assets can benefit both the giver and the recipient. The steps below can help you determine if this strategy will work for you.
Step 1 - Do you have appreciated assets that would require you to pay capital gains taxes if you sold them?
Appreciated assets are investments (stock, mutual funds, etc.) that have appreciated in value over what you paid for them originally, or that someone gave to you and are now worth more than they paid for it. Because these investments have increased in value, you have an unrealized capital gain. That means if you sell the investment in question, you will have a realized gain and will have to pay capital gains taxes on the difference between what was paid for the investment (cost basis) and its value at the time it is sold. Unless you enjoy making gifts to the US Treasury (paying income taxes), this is a not a good use of your money.
Step 2 - Do you give on a regular basis or have giving commitments you need to fulfill to a church or non-profit organization?
Charitable giving has many benefits to your personal financial situation and to the organization to which you give. Most of us do our giving in cash. We either write a check or give actual dollars to our church or various other non-profit organizations. As a result, we are able to take a tax deduction for these contributions - if you itemize your tax deductions then you may include your charitable gifts and reduce the amount of money on which the IRS figures your tax liability. This is a great benefit to you personally.
Also, non-profit organizations (which includes most churches) do not have to pay tax on gifts received. Therefore you can think of your gift as tax free income to these organizations - they can put to use 100% of what you give.
Step 3 - You can gift your appreciated assets in lieu of your cash giving!
As noted above, if you have appreciated assets, you will pay capital gains tax when they are sold. The good news is that non-profit organizations do not have to pay capital gains tax when they sell appreciated assets. This is what creates the ultimate win-win. See the example below:
John and Jane have $10,000 of xyz stock that they paid $5,000 for three years ago. If they sell this stock, they will pay tax on the difference between the purchase price ($5,000) and the current value ($10,000). Their giving plan is to give $15,000 to the church this year. Instead of giving it all in cash, they can give $10,000 of their donation in the form of the stock. They will not pay tax on this gift. The church will not pay tax on this gift. They can then take the $10,000 of cash they would have given and use those funds to replace the $10,000 investment that they gifted to the church. John and Jane were able to reduce their tax liability by employing this giving technique. If their capital gains tax rate was 20% then they avoided $2,000 in income tax by gifting the stock versus selling it!
You fulfill your gift commitment or desire. The church receives your commitment or desire. No one pays capital gains tax and you have a positive gifting experience for both you, the donor, and the organization or church!
What if I don't want to get rid of my investment?
No problem, just gift the investment and repurchase it from your investment source (mutual fund company, brokerage company, etc.) with the funds you would have given in cash.
Are there limitations on how much I can deduct on my taxes?
Yes, there are certain limitations regarding how much we can deduct on our taxes, but most people will find these limits do not apply to them. Consult a tax advisor or resource for more information.
How do I actually do this?
Contact your financial advisor, tax accountant or the church or non-profit organization to whom you want to make the gift and they should be able to give you further direction.
(The information noted above is not intended to be specific tax advice but rather general information. Please seek the advice of a tax professional before under taking this strategy.)
The National Planning Group of Ronald Blue & Co. is a unique division within RB&Co. that serves the everyday steward - For more information you can visit their website: www.everydaysteward.com.