2007-01-05 / Columnists

Focus On Financial Affairs

When The Urge To Be Generous Hits, Think About April 15
Commentary By Stephen J. Levine President, Harbor Financial, Inc.

Throughout the year, organizations and institutions call on you, asking you to make contributions to their worthy causes.

No matter what form your contribution takes, you will almost certainly realize some tax savings for it. We go through our checkbooks every Spring, looking for those small checks, written while volunteer collectors waited at our front door. Cash contributions are deductible, and the obsolete, but still functional, computer you donate to your church is also deductible for its cash value.

But that's the level of giving most of us do on a regular basis, and the tax benefits are relatively straightforward. Today, I want to talk about special occasions when you can, and want to, give a large gift.

When that happens, give some thought beforehand to structuring your gift for maximum tax advantage.

Suppose your twenty-five 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 an individually managed account that you own, you find 200 shares of a stock that your money manager bought two years ago for $25 a share. The stock has risen to $50 a share, so you instruct the money manager to sell the shares, planning to donate the $10,000 in proceeds to your school.

Because the stocks are in an individually managed account on which you pay an asset-based advisory fee, there are no trading costs associated with the sale. (Stocks sold through a broker, or online, do incur trading costs, which, for ease of calculation are not included in this example.) Finally, suppose you are in the 35% 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 $3,500 in taxes by donating the cash.

Deduction for

cash contribution$10,000

Tax ratex .35

Tax savings$ 3,500

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 and its sale price ($5,000).

Because you held the stock for more than one year, the gain will be taxed at 15%, the current long-term capital gains tax rate.

Taxable gain

on sale of stock$5,000

Tax ratex .15

Tax cost$750

This reduces your real tax savings on the contribution to $2,750.

Tax savings

on deduction$3,500

Taxes paid

on capital gains$750

Net tax savings$2,750

If, on the other hand, you simply gave the stock to your college, your $3,500 tax savings would remain intact. This is because you can deduct the fair market value of the contributed stock ($10,000 on the date of the donation), not just the $5,000 you paid for it. And, since you never realized the $5,000 gain that the current price of the stock less the price you paid for it represents, you do not have to pay the $750 taxes on that gain.

Deduction for

stock contribution$10,000

Tax ratex .35

Tax savings$ 3,500

Taxable Gain- $0

Net tax savings$ 3,500

If you're thinking about making a substantial gift, look over your portfolio. Of course, there are some rules. Generally, you must own the appreciated stocks more than one year before donating them. You cannot give other types of property, such as inventory from your furniture 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. And, the most important rule, whenever you are doing any tax planning, consult your tax advisor BEFORE you take action.

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