End-of-Year Charitable Giving with Highly Appreciated Assets
It’s that time of year again, when we look at the great blessings that have been bestowed upon us, and (secondarily) have to start worrying about how big of a cut old Uncle Sam is going to take. Rather than pay excess tax, many of us look to reduce our tax burden through charitable giving; knowing that whatever charitable cause is dear to our hearts, the charity will be better off and more efficiently use our blessings.
We all know about Capital Gains Tax, the cut Uncle Sam takes when we sell an asset that has increased in value over time. The Capital Gains tax we pay is either 15% or 20%, depending upon circumstances, of the increased value. Let's say you were one of the lucky few who bought a $100 worth of Amazon stock 30 years ago. Since then, that stock has appreciated 249,208%. That means you have an unrealized gain of $24,919,800 (I said you were lucky 🙂). If you sold that stock, you would be taxed in the ballpark of $5,000,000 (Five Million Dollars!). More commonly though, people have stocks, artwork, or real estate that has increased in value by 200 or 300%. Maybe an initial investment of $10,000 that is now worth $30,000, would cause a capital gains tax liability upon sale of $3-4,000.
You have had a good year and have income that will be taxed at 32, 35, or 37% and you want to do some charitable giving. As we all know, you get to deduct charitable gifts from your taxable income. We also all know that 501(c)(3)’s don't pay taxes. So, let’s say that you have $30,000 of income that will be taxed at 35% for a total tax burden of $10,500, and you would like to make a charitable gift of that $30,000 to get your deduction, save $10,500 of tax liability, and support a cause you know will really do some good. And in this instance, you don't have an extra $30,000 of cash in your checking/saving account to make the gift.
First, I am going to tell you the wrong way to make that gift. Step one: Sell $35,000.00 worth of some of that stock that has appreciated 300 percent Step two: write your favorite charity a check for $30,000. Wait, why did I have to sell $35,000.00 worth of stock to make a $30,000 gift? Because you're going to realize an additional 4-5k thousand dollars of capital gains tax liability on the sale. So you sold, $35,000 worth of stock to make a $30,000 gift and now only get $6,500 in tax savings. That $30,000 gift had a net cost to you of $28,500.00.
Now, here’s the right way. Give the charity $30,000 worth of highly appreciated stock. Let the charity sell the stock for cash (because you didn’t sell it, you don’t have capital gains liability). You gave away $30,000 worth of stock and get a $30,000 deduction, saving you $10,500 worth of taxes. The net cost of that $30,000 gift is $19,500. When the charity sells that stock, it pays no taxes and can put all $30,000 to work making the world a better place. You gave the same gift, for $9000 less.
Now let’s say you did have the $30,000 in your checking/savings account and you really like that highly appreciated stock. Give the stock to the charity anyway, then re-buy the stock with your $30,000. You won't accrue the extra capital gains tax on the sale, and your new tax basis in that stock will be $30,000 instead of $10,000, meaning you will save that $4-5000 of capital gains tax when you are actually ready to cash out. In this scenario, you have made a 30k gift that only costs you 15k (due to your tax savings).
Have questions? Lubnau Law is here to help: (307) 682-1313.