No matter how tax legislation affects capital gains tax, it continues to be a factor in financial planning. For those with charitable interests, making gifts with long-term appreciated property instead of cash should always be considered.
Even if cash is readily available for a desired contribution, ownership of marketable property, either securities or real estate, should first be reviewed. If an asset (1) has been held for more than one year, (2) is appreciated in value and (3) otherwise will be sold, a gift of the property itself is likely to be more advantageous than writing a check.
Examples of Efficient Giving
Long-term capital gain property is an asset owned for more than one year, with appreciation in value that is subject to the federal capital gains tax when sold. If, instead, it is given to a qualified charitable organization like Kappa Alpha Order Educational Foundation, it is deductible for its full fair market value, and there is no capital gains tax to pay.
If the asset otherwise is to be sold, now or in the foreseeable future, the federal capital gains tax avoidance is a tax savings to you. When added to the tax savings from the use of a charitable income tax deduction, the dual tax benefit reduces the net cost of your gift.
To illustrate, assume Lucy wants to make a gift of $10,000. Lucy has a marginal federal income tax rate of 28 percent and is not subject to state or local income taxes. The stock’s value is $10,000, with a cost basis of $4,000.
Cash vs. Stock Gifts
Value of desired gift
$10,000
$10,000
Marginal income tax rate
x .28
Tax savings from deduction
$2,800
(2,800)
Net cost of cash gift
$7,200
Capital gain if sold
$6,000
Capital gains tax rate
x .15
Capital gains tax avoided
$900
(900)
Net cost of stock gift
$6,300
In this example, using the stock instead of writing a check saves an added $900. A higher federal bracket, and any state or local income taxes, would further improve results.
Income-Producing Gifts Based on Appreciated Property
When charitable gifts are made through the use of charitable remainder trusts, funding the trust with long-term capital gain property also results in two tax savings—from a partial charitable income tax deduction and from avoidance of the up-front capital gains tax.
To illustrate, Jane, aged 77, is in the 35 percent federal income tax bracket. She made an investment many years ago in stock now worth $300,000, with a cost of $90,000. The stock dividends are only 3 percent, and she wishes to reduce her market risk.
Selling the stock would result in a 15 percent capital gains tax on $210,000 of long-term capital gain or $31,500. She uses the stock, instead, to fund a 6 percent charitable remainder annuity trust (CRAT), paying the $18,000 annuity in annual installments (doubling the amount of her dividends). Following are the results:
Funding a CRAT
Fair market value of funding asset
$300,000
Charitable deduction*
$157,884
Marginal federal tax rate
x .35
Ordinary income tax saved
$55,259
(55,259)
Capital gains tax avoided
(31,500)
Net cost of funding CRAT
$213,241
*Based on a 3.4 percent charitable midterm federal rate
Often the Most Effective Gift
A gift of appreciated property can work wonders. It can provide maximum benefits for us at a minimum cost to you. For assured results, consult your tax advisor.
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For more information, please contact Erik Showalter at 540-460-1401 or 540-463-1865 or eshowalter@ka-order.org.
The information in this Web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income tax include federal taxes only. Individual state taxes and/or state law may impact your results.
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