Have you considered charitable giving as a tax planning strategy for 2014?

It’s that time of year again! As we enter into the holiday season (which based on the local Target store is now officially the day after Halloween) of festive parties, family gatherings, and of course,  gift giving, it creates a natural opportunity for those who are charitably inclined to consider yearend charitable contributions.  In addition to the philanthropic aspect of charitable giving, it also can be used as an effective  estate and yearend tax planning tool.

Most American households make their charitable gifts in cash, with the corresponding tax deduction allowed as an itemized deduction on their individual tax returns. In most instances, taxpayers may deduct up to 50% of their adjusted gross income (AGI) for cash gifts made to public charities.  For gifts that exceed the 50% threshold, the contribution deduction is carried forward for a five year period.

For those who plan on incorporating charitable giving into their estate and tax planning strategies, gifting of highly appreciated property (stock, mutual funds, real estate) can be an extremely valuable tool that is often overlooked. This tax planning strategy is derived from the general idea that the deduction for a donation of property to charity is equal to the fair market value (FMV) rather than the donor’s cost basis.  When the donor contributes the appreciated property at a gain (i.e. FMV is greater than their original cost), they are receiving a double benefit: a charitable deduction, plus avoiding paying capital gains tax on the appreciation of the donated property.  A charitable deduction for appreciated assets is allowed to the extent that it is not greater than 30% of AGI.  In order to qualify for the “double benefit” of the contribution of appreciated property, the property must be held for at least one year, and any property valued at greater than $5,000 (except for publicly traded securities) must be appraised by a qualified appraiser.

For illustrative purposes, assume that you own XYZ stock that you purchased in 2009 for $1/share.  The stock price has now skyrocketed to $101/share and you anticipate a $100,000 gain on the disposition of your $1,000 shares of this stock. Assuming your AGI is $400,000, you would not only be allowed the $100,000 charitable deduction for donating this stock, but could also end up saving over 28% (15% Federal + 9.3% CA + 3.8% NII Tax) in combined taxes.  If you are not motivated by tax savings but rather motivated by maximizing the gift to the charity, consider this strategy as an opportunity to gift an additional 28% to a charity by gifting the before-tax value.

For many taxpayers, charitable donations are part of their annual household budget.  In a year when you anticipate unusually high income (i.e. sale of a business, last year before retirement, etc.), consideration should be given to “pre-funding” your charitable contributions.  Donor advised funds can be used to “pre-fund” future contributions and offset income that would have otherwise been taxed at higher tax rates.

As an example, assume  in 2014 you sold your business and are expecting to have $600,000 in joint taxable income with your spouse (and next year your taxable income will be closer to $80,000). Your household typically contributes $10,000 annually to a specific charity.  If you “pre-fund” your contribution for the next five years by making a $50,000 contribution to a donor advised fund for 2014, you will save approximately 18.9% in taxes, or $9,450 (6% versus 10.3% CA tax rate, 25% versus 39.6% Federal), still providing the charity with the same total contributions you would have provided over a five year period.

In addition to donations of appreciated assets and using donor advised funds as  tax savings tools, charitable trusts can also provide tax benefits for those wanting to contribute assets to a charity but maintain cash flow from the asset either during their lifetime or for a specific period of time.  If you would like to learn more about strategies for using charitable donations for both estate and tax planning, please contact your accountant at Linkenheimer CPAs.

Written by Carli Ortiz, CPA, CGMA, Manager