When we contribute to our favorite causes, most of us go the easiest, most familiar route and simply write checks or use credit cards. We receive income tax deductions; the charities receive money.
But donors who want to make major gifts and also lose less to the IRS should familiarize themselves with other, often-overlooked ways to make donations. One option that allows the charitably inclined to realize significant tax benefits is to donate appreciated properties they have owned for more than 12 months and that will be taxed as long-term capital gains when sold. Some common examples of investments that might fit this profile are shares of individual stocks, mutual funds and exchange-traded funds.
The "give 'em away" gambit permits contributors of appreciated assets to deduct their full market value when donated. Savvy benefactors also avoid all of the federal and state taxes assessed on profits realized from sales of investments, effectively decreasing the cost of donations.
The Wall Street Journal edition for Nov. 22, 1991,notes that "This tax-saving strategy is immortalized in the 1959 film 'The Young Philadelphians,' starring Paul Newman" as an ambitious associate attorney involved with the elite of the Main Line--the term for the affluent suburbs lining the Pennsylvania Railroad west of Philadelphia. The Newman character's "suggestion of giving appreciated stocks to the local Society for the Prevention of Cruelty to Animals helps him win the business of Mrs. J. Arthur Allen, an eccentric millionaire, who arrives at his office with her precious pooch Carlos in her arms." Mrs. Allen was played by Billie Burke, best known to television audiences as Glinda the Good Witch of the North, in "The Wizard of Oz."
A deduction for all taxpayers. Donations of appreciated assets might seem to be an appropriate technique only for Mrs. Allen and her well-heeled acquaintances. But they can also benefit people of far more modest means.
To show you an example of how the numbers look, let's say Elijah Vennebush intends to fulfill a $10,000 pledge to the Mint Theater Company. His long-term holdings include shares of stocks that he acquired for $4,000 and that he is now about to unload for $10,000. To reap a perfectly legal double benefit, Eli should contribute stock worth $10,000, instead of making a cash donation of $10,000.
Going the stock route makes no difference to the Mint, a tax-exempt entity based in New York City that incurs no taxes when it sells the shares and ends up with close to the same amount of money. But it does make a decided difference in the size of Eli's tax tab. A charitable gift deduction of $10,000 cuts taxes by $3,000, assuming Eli falls into a combined federal and state bracket of 30 percent. In addition to that, he sidesteps forever the taxes that are due on the $6,000 gain if he were to sell the stock.
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Julian Block writes and practices law in Larchmont, N.Y. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: "a leading tax professional" (New York Times); "an accomplished writer on taxes" (Wall Street Journal); and "an authority on tax planning" (Financial Planning Magazine).
His tax guides include "Tax Deductible Travel and Moving Expenses," "Tax Tips for Marriage and Divorce," "Easy Tax Guide for Writers, Photographers, and Other Freelancers," and "Home Seller's Guide to Tax Savings." For information about his books, go to julianblocktaxexpert.com.