financial adviser | by bill griffith

When the Urge to Be Generous Hits, Think about April 15^th

Throughout the year,  you’re solicited by any number of worthy causes. Regardless of the form your contribution takes, you will almost certainly realize  some tax savings for it. Both cash contributions and items with cash value are, of course, deductible. But that’s the level of giving most of us do on a regular  basis, and the tax benefits are relatively straightforward.

However, there  will be special occasions when you want to give a large gift. When that happens, give some thought beforehand  to structuring your gift for maximum tax advantage.

Suppose your 25-year college reunion is coming up next June, and you want to make a substantial contribution to the class gift. Looking for ways to generate cash, you review your investments, and, in your individually managed account, you find a mutual fund that your advisor bought two years ago for $25 a share. Its value has risen to $50 a share, so you instruct your advisor to sell it so you can donate the proceeds let’s  say, $10,000, to your school.

Assume that you sell stocks or mutual funds with no trading costs. (Stocks sold through a broker, or many on-line services, do incur trading costs, which, for ease of calculation are not included in this example.) Finally, suppose you are in the 39 percent tax bracket.

Because you give the $10,000 to your alma mater you get to deduct $10,000 from your taxable income. So, theoretically, you save $3,900 in taxes by donating the cash.

            Deduction for cash contribution            $10,000

            Tax rate                                                       x    .39

            Tax savings                                             $  3,900

However, on another line of your 1040, you will have to pay the tax on your capital gain, the difference between what you paid for the stock or fund and its sale price ($5,000). Because you held the stock for more than one year, the gain will be taxed at 20 percent (the current long-term capital gains tax rate.)

            Taxable gain on sale of security   $5,000

            Tax rate                                           x   .20

            Tax cost                                          $1,000

This reduces your real tax savings on the contribution to $2,900.

            Tax savings on deduction                    $3,900

           Less: Taxes paid on capital gains     $1,000

            Net tax savings                                     $2,900

If  you simply gifted the stock or mutual fund shares to your college, though, your $3,900 tax savings would

remain intact. This is because you can deduct the fair market value of the contributed security ($10,000,) on the date of the donation not just the $5,000 you paid for it. And because  you never  realized  the $5,000 gain that the current price of the security represents, you do not have to pay the $1,000 in taxes on it.

            Deduction for security contribution      $10,000

            Tax rate                                                   x    .39

            Tax savings                                           $3,900

            Taxable Gain                                      - $      0

            Net tax savings                                     $3,900

If you’re thinking about making a substantial gift or make regular contributions to a particular organization, look for highly appreciated stocks or funds (low cost- basis stocks.) They may represent an opportunity to give the gift you want to give and save taxes.

Generally, you must own the appreciated stocks or mutual funds more than one year before donating them. You cannot give other types of property, such as inventory from your  store, as “appreciated.”  Nor can you donate artwork you created, although art you bought more than a year ago does qualify, if it has appreciated,  as do antiques and real estate.

Charitably-minded individuals and families can effectively gift stocks, gift life insurance proceeds, and establish private foundations for far smaller amounts than ever before. 

If you or your family decide to embark on a significant plan to assist a charity of your choice, consult your financial advisor before you take action.

Bill Griffith is a principal of Aspen Advisors, Inc., a fee- only financial planning and investment management services firm.  Phone: 913.432.6792. e-Mail: bgriffithaspen@aol.com.