This may be controversial, but I am willing to bet that most
people who give money do so in a manner that isn't optimal for their tax
situation. It's a missed opportunity to potentially save thousands of dollars
in taxes, by utilizing appreciated stock which benefits the organization you
want to help and saves you more in taxes. Let's look at how this can play out
and how you can take advantage of it yourself.
Often people will give cash and not consider the opportunity
of giving stock instead. They may want to give in cash, but don't have the
amount they want to give and instead will sell the stock first and then give
the proceeds. However, this is the least tax efficient method - creating a
taxable event when instead they could just gift the stock to the organization
while still getting the deduction and not triggering the taxable event. Let's
look at an example below.
Let's say Andy wanted to give $100,000 to his favorite
charity and Andy was sitting in the 35% marginal tax bracket. Andy could give
the $100,000 in cash and by itemizing receive a $100,000 deduction which in
return would save himself $35,000 in taxes. Not a bad benefit for helping his
favorite charity.
However, Andy doesn't have the money in cash and instead
decides to sell some of the stocks in his investment account to get the
$100,000 and then gives it to the organization. By doing so Andy triggers a
taxable event and a capital gain of $60,000 which results in him having to pay a
total capital gain (Fed, State, and NIIT) tax rate of 29.55% in Georgia or
$17,730 in taxes. So, although he got the $35,000 deduction for the donation,
that was offset by the taxable event and essentially would only save him $17,270
in taxes.
A better option for Andy would have been to instead donate
the $100,000 of stock to charity, therefore not incurring capital gains and
saving himself significantly more in taxes. As a result, because Andy donates
the stock, he not only saves the $35,000 in taxes, but also the $17,730 in
capital gains tax he would have paid in the future when he sold the stock. This
results in a potential total tax savings of $52,730 for a true total donation
cost of $47,270. Below is a chart breaking down this exact example.
|
|
Scenario 1 Donate Cash |
Scenario 2 Sell Stock and
Donate Cash |
Scenario 3 Donate
Appreciated Stock |
|
Amount Donated |
$100,000 |
$100,000 |
$100,000 |
|
Tax Savings |
$35,000 |
$35,000 |
$35,000 |
|
Capital Gain Realized |
$0 |
$17,730 |
$0 |
|
Future Capital Gain Eliminated |
$0 |
$0 |
$17,730 |
|
True Cost of Donation |
$65,000 |
$82,280 |
$47,280 |
|
Assumptions: |
|
|
|
|
Federal Marginal Tax Rate |
35% |
|
|
|
Federal Longterm Capital Gains Tax
Rate |
20% |
|
|
|
Net Investment Income Tax |
3.8% |
|
|
|
State (GA) Capital Gains Tax Rate |
5.75% |
|
|
|
Total Capital Gains Rate |
29.55% |
|
|
|
Stocks Unrealized Gain |
$60,000 |
|
|
As we enter the holidays and end of year you may be inclined
to give to charity or another organization, which I encourage you to do. There
is truly no better feeling than helping those in need or supporting causes that
are doing great work. However, consider how this may impact you financially and
how you may be able to optimize your giving from a tax perspective. Feel free
to reach out to your Private CFO to discuss more; they would be more than
willing to help you decide the best way to be charitable this Holiday season!
If you would like to receive more information on making smart money moves for your future, be sure to contact us today!
