Generosity and Tax Strategy
As you consider your own stewardship this year, here are some basic strategies that may improve the income tax benefit you receive for your year-end gifts.
- Simply writing a check may be the easiest way to give. Certainly, it’s the most popular, and millions of Americans engage in the practice multiple times every year. You can probably receive a tax deduction for your gift (up to 50% of your adjusted gross income). You just need to get a receipt, and have a sufficient dollar amount of other deductions to itemize using Schedule A on your federal income tax return. So, gifting cash may be easy, but it’s not necessarily always the best option from a tax perspective.
- Donating stock may be a smarter approach. You may donate the stock directly to church, or you may sell the stock and donate the proceeds. It all depends on whether the stock has increased or decreased in value and how long you have owned the stock.
- It may make the most sense to donate stock directly to a charity if you have owned the stock for more than year and the stock has increased in value. Let’s say you own 100 shares of XYZ stock that you purchased more than a year ago for $30 per share and is now worth $50 per share. You can deduct the fair market value, which is $5,000. What’s more, you will not have to pay taxes on the $2,000 long-term capital gain. The current federal capital gains rate is 15%, so this saves you $300 in capital gains taxes.
For stock held less than one year, you can deduct only the cost basis. So, using our example with XYZ stock, the cost basis would be $3,000.
- If your stock has decreased in value, you would be better off selling the stock and taking the loss on your tax return. Let’s say the 100 shares of XYZ stock you bought for $30 per share is now worth $20 per share. You would be able to write off the $1,000 loss before giving away the proceeds of the sale, and you’ll still be able to deduct the value of the gift as a $2,000 charitable deduction.
- Concentrated stock position matters. Typically, people with portfolios concentrated in a single stock face a critical decision: diversity or hold. The danger with holding most of your wealth in a single equity position is that, if the stock market drops significantly, it could be disastrous financially. Diversity, on the other hand, would entail selling some of your concentrated stock (ostensibly to purchase more securities) and potentially realizing long-and short-term capital gains, on which taxes would be due.
- Gifting stock to the church means your gift is eligible for an immediate income tax deduction and, if it represents an appreciated asset, it also avoids capital gains taxes. Under this solution, you are obedient with your tithe and at the same time, you address a complicated financial problem.
Other Ways to Give at Year End
Direct Charitable IRA Distribution
If you are age 70 1/2 or better and have an Individual Retirement Account (IRA), you may be able to make a charitable distribution directly from your IRA to First Presbyterian Church or Orlando and avoid having the distribution treated as taxable income to you. Such gifts are generally limited to $100,000 per year per taxpayer. This special provision in the law is scheduled to expire on December 31, 2013 and will not be available next year unless Congress extends it.
The Advantage of Giving Appreciated Stock
If you own stock in a publicly-traded company that has appreciated in value, you can contribute shares of the stock to First Presbyterian Church of Orlando without selling it. Under Federal tax law, if you have held the stock for at least a year, you may be entitled to deduct the full value of the stock and never have to pay tax on the gain. This can be much more advantageous than selling the stock (which would create taxable gain) and donating the proceeds from the sale. The transfer would need to be completed by December 31 in order to qualify for a tax deduction this year.
Giving Appreciated Real Estate
If you own real estate that has appreciated in value, you can contribute the real estate to First Presbyterian Church of Orlando without selling it. Under Federal tax law, if you have held the real estate for at lease a year, you may be entitled to deduct the full value of the property and never have to pay tax on the gain. This can be much more advantageous than selling the property (which would create a taxable gain) and donating the proceeds from the sale. Certain due diligence steps are required before First Pres can accept gifts of property, and the transfer would need to be completed by December 31 in order to qualify for a tax deduction this year.
Strategy tips and advice courtesy of Batts Morrison Wales & Lee, P.A. nonprofit CPA.
If you have any questions regarding stewardship or any other tax strategy related to your tithe, please call our Director of Finance, Tom Levesque at 407.423.3441.