Charitable Giving with a Double Tax Break

Posted on November 27th, 2008 in Newsletter Articles, Charitable Giving by wayne

As we celebrate the spirit of Thanksgiving we realize what a blessed and abundant life we have, even in tumultuous financial times. Many of us will want to share some of our blessings with those that are not as fortunate through our year-end charitable giving. Did you know that there is a simple and free way to give to all of your favorite charitable organizations and receive a double tax break? All you need to do is establish a Donor Advised Fund.

You may be aware that when you can give appreciated, long-term capital gain property, such as stocks, bonds and mutual funds, to a charitable organization, you can receive a double tax savings. You may deduct the full market value of the capital property as a charitable deduction plus you are not required to pay capital gains taxes on the property’s appreciated value. However, to give stock, bonds or mutual funds directly to multiple organizations can be both cumbersome and very time consuming.

To overcome the problems of directly gifting appreciated capital property, you can create a Donor Advised Fund. These are qualified, private, non-operating foundations that pool their donations and allow you to select your favorite charities for gifts. The gifts that you can make can be as little as $50 and can be given to any qualified charitable organization.

Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts to their clients. Ask your brokerage firm if they provide for Donor Advised Funds and how you can set one up. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess amounts available for charitable gifts in future years.

Let’s look at an example of how a Donor Advised Fund works. Suppose that you bought 100 shares of IBM stock in July 1993 at $10.50 per share (yes, it was actually that low in 1993!) You now wish to sell this stock, but you would prefer not to pay the long term capital gains taxes on your profit.

Today, IBM is trading at approximately $82/share. Your $1,050 investment in 1993 is now worth $8,200. If you donated this stock to your Donor Advised Fund, you would get an immediate charitable deduction of $8,200 and pay no capital gains taxes on your $7,150 capital gain. If you are in the 25% Federal and 5% State tax bracket, you would save almost $4,000 in taxes. Thus, a gift of $8,200 to your favorite charitable organizations has an after tax cost to you of only $4,200.

Even if you wanted to continue to hold IBM stock, you could gift the stock to the Donor Advised Fund and immediately buy 100 shares of IBM stock, which would have a new cost basis of $8,200. Since you are gifting the IBM stock and not selling it, the “wash rules” do not apply. This is a great method of increasing your stock basis while almost doubling the amounts of your charitable gifts, on an after tax basis.

Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. To make a gift to your charitable organization, you simply do an on-line request for gifts of $50 or more for each organization. It is easier (and cheaper) than writing a check. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.

Year End Tax Saving Tips

Posted on November 27th, 2008 in Newsletter Articles, Taxes by wayne

For most of us, 2008 has not been a good year for our finances. One way to maximize your financial abundance is to avoid paying more in taxes than you should. With the end of 2008 rapidly approaching, let’s look at some actions that can lower the amount of taxes that you will owe on April 15, 2009.

1. Capital Loss Deduction – If you have any investments in taxable accounts, you likely have unrealized capital losses in 2008. Before year end, determine if you have realized any capital gains for 2008. If you have not sold any investments at a loss this year, it may be wise to sell enough to assure that your net realized capital losses are at least $3,000 in 2008. This $3,000 loss can be used to offset other income that you report for 2008.

2. Mutual Fund Capital Gains – With the markets off 40%, you might think that you will receive no capital gain distributions from your mutual funds in 2008. However, many mutual funds will be making a capital gain distribution in December. If you have mutual funds in your taxable accounts, call the mutual fund company and ask if they expect to make a capital gain distribution. If so, either sell the fund before the distribution date or be sure you have other capital losses to offset any gains received.

3. 401(k) and 403(b) Plans – Maximize your 401(k) and 403(b) contributions before year end. The maximum tax deductible contribution for each plan is $15,500 in 2008. However, if you are over 50 you may make a “catch up” contribution of an additional $5,000 for a total of $20,500. If it is too late to do this for 2008, be sure to sign up for the maximum reduction that you can afford in 2009.

4. Roth IRA Conversions – If your modified Adjusted Gross Income (AGI) for 2008 will be less than $100,000, you are eligible to convert your current IRA holdings into a Roth IRA. Roth IRA funds will remain tax free for both your lifetime and the lifetime of your beneficiaries. While you will be required to pay taxes on the amount converted, with the markets down, this may be an ideal time to convert. Check with your financial advisor or CPA to see if this is an appropriate strategy for you.

5. Charitable Gifts – In rough financial times, it is often hard to remember that many people are experiencing much worse financial pain than we are. If you are inclined to help those less fortunate than yourself, charitable giving can also help reduce your taxes. If you give away items, be sure that all items are in at least “good” condition. Also, keep a detailed list of the items, their condition and the thrift store value of each item. If you have a required IRA distribution that you must take by year end, consider a direct rollover of the amount required to your favorite charitable organization.

6. Donor Advised Funds – If you are going to provide cash charitable gifts in 2008, you might consider setting up a Donor Advised Fund. If you have long term capital assets which have appreciated since you purchased them, you can donate the asset to a Donor Advised Fund account and receive a deduction for the full value of the long term asset. Not only do you get this charitable tax deduction, you will never pay taxes on your capital gains.

7. Year End Gifts – For people with large estates who are worried about eventual “death (estate) taxes” you can annually give up to $12,000 ($24,000 for a couple) to any individual. For a wealthy couple with 3 children and 7 grandchildren, $240,000 can be removed from their taxable estate every year. While this saves no current year taxes, it could substantially reduce eventual estate taxes.

There are other methods of reducing your 2008 taxes which do not require action by the end of the year. These will be addressed future articles. If any of the above ideas apply to you, do not procrastinate. If you do not complete these actions before December 31, you will not be able to use them in 2008.