“…a long-term strategy can help you achieve the twin goals of helping those who are less fortunate while reducing your income-tax bill.” – Dave Polstra, co-founder Brightworth
We just spent the last week reflecting on all we have to be thankful for, and as we enter the Christmas season many of us are fortunate enough to consider ways in which we can respond out of gratitude by giving of our time, money and energy to improve the lives of those around us. Year-end giving is a common theme for us and our clients, both because of the general spirit of the holiday as well as the calendar year tax deadline for charitable contributions.
While the primary driver of charitable gifts is always a compassionate heart and a desire to serve others, we are fortunate to live in a country that offers tax breaks to incentivize and encourage such giving. Structuring gifts to take full advantage of tax breaks not only reduces the "net cost" to you of supporting your favorite charity, it also empowers you to consider multiplying your gift and impact.
To illustrate the power of a coordinated giving strategy we’ll present an example using Jane Doe, a charitably-minded high earner living in Colorado Springs, CO. Jane is looking to make a year-end gift of $10,000 to her favorite local charity. To make the math simple, we’ll assume Jane’s combined federal and state income tax bracket is 35% and her capital gains tax bracket is 20%. Additionally, we’ll assume that Jane already has enough deductions to itemize on her tax return, meaning this gift will offset her taxable income dollar for dollar. Finally, we should mention that Jane bought 60 shares of Apple stock in a taxable brokerage account many years ago for $2,500. Those shares are now worth $10,000.
First, let’s assume Jane simply writes a $10,000 to the charity. The most obvious layer of tax benefit is the deduction to her taxable income which is worth $3,500 in tax savings ($10,000 X 35% income tax). So although the full $10,000 is deposited by the charity, the gift is really only “costing” Jane $6,500 net of her tax savings. So far so good.
But what if, instead of writing a check, Jane actually gifted her 60 shares of Apple stock instead? First of all, let’s consider the tax implication if Jane were to sell the stock in the open market. She would receive $10,000 proceeds from the sale, but would then have to pay $1,500 in capital gains tax (20% tax on her $7,500 realized gain). By gifting the stock not only would she receive the same income tax deduction for the full $10,000 market value of the stock, but the capital gain liability would simply be eliminated as long as the shares had been held for at least a year. This strategy would save Jane another $1,500 in pent up tax liability, and if she wanted to continue owning the AAPL stock she could simply use the $10,000 cash that she would have otherwise given to the charity to repurchase the shares in her account at a stepped up cost basis.
At this point Jane has accrued $3,500 in income tax savings and $1,500 in capital gain tax savings, reducing the net cost of the $10,000 gift down to only $5,000! Giving appreciated assets such as stocks and bonds to charity is a great way to “double down” on the tax savings afforded by charitable gifts, and this is especially relevant with the stock market near all-time highs.
As a final layer to Jane’s giving strategy we’d like to share a state tax credit called the Enterprise Zone that is available to Colorado residents when giving to certain qualifying charities. The “E-Zone” is a statewide program that is designed to promote business development and nonprofit engagement within economically distressed areas throughout the state. Donations to qualifying charities provide the donor with a state tax credit equal to 25% of the value of their donation for cash gifts, and 12.5% of the value of their donation for in-kind gifts (stocks, etc). Rather than being an additional deduction, this is an actual tax credit which is far more valuable.
Fortunately Jane’s charity qualifies for the E-Zone credit, meaning her $10,000 donation results in a $1,250 credit on her state tax return (she gets a 12.5% credit since her gift was "in-kind"). Let’s see what this does to her net cost of making the gift…
So we can see that while Jane’s true net cash outlay is only $3,750, the actual gift received by the charity is over 2.5 times that amount at $10,000!
We can all be thankful that we live in a country that values and promotes charitable giving by providing tax incentives for doing so. In Jane’s case, after looking closely at the math she decided not only to give the shares of AAPL stock, but to write an additional check for $10,000 on top of that. After accounting for the additional tax savings her net cost of making the combined gift of $20,000 is still significantly less than the $10,000 she originally intended to give. This is a great example of how carefully structuring a charitable gift can actually empower the donor to multiply that gift and have an even greater impact.
NOTE: The ideas shared above are only a couple examples of many effective charitable giving strategies. It’s important to discuss these matters thoroughly with your financial advisor and CPA before executing. Please reach out to us if we can be of any additional service along these lines!
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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