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.

The IRA Charitable Rollover

Posted on October 15th, 2007 in Charitable Giving by wayne

The Pension Protection Act of 2006 (PPA) allows you to roll over up to $100,000 from an individual retirement account (IRA) directly to a qualifying charity.  However, the time to do a charitable rollover from your IRA is rapidly coming to an end.  Unless Congress extends it, the IRA Charitable Rollover will end in 2007.

If you are at least 70 ½ years old, you may give up to $100,000 directly to a charitable organization and exclude the full amount of the gift from your gross income.

Since you may already deduct your charitable gifts from your annual income, you might be wondering why anyone would use this rollover capability.  There are at least three areas where this approach may be beneficial.

  1. If you do not itemize your tax deductions on Schedule A of your income taxes, you may want to rollover your IRA “required distribution” amount to a charity.  If you do not need your required distribution to live on, the rollover provides a generous charitable gift and you do not pay taxes on the unneeded required distribution.
  2.  You may want to give a large gift to your favorite charity, but the charitable deduction ceiling prevents you from fully deducting the amount that you would like to give.  With the IRA charitable rollover, you may increase the amount of your gift by up to $100,000, with the total gift fully “deductible” in 2007.
  3. If you wish to give a large charitable gift and reduce your future IRA “required distributions,” you may reduce your IRA by up to $100,000 and provide a generous gift to your favorite charity.

You cannot do a rollover to a donor advised fund.  If you have a donor advised fund, use your appreciated stocks to fund it and provide a direct IRA rollover to your favorite charities in 2007.

Donor Advised Funds

Posted on September 6th, 2007 in Charitable Giving by wayne

If you are planning on making charitable gifts at the end of the year, to support your favorite charities and be able to claim a 2007 tax deduction, now is the time to consider setting up a Donor Advised Fund.

You may already know that giving appreciated long-term capital gain stock to a charitable organization gives you a double tax savings. You may deduct the full market value of the stock as a charitable deduction plus you are not required to pay capital gains taxes on the stock’s appreciated value. However, to give stock directly to multiple organizations can be both cumbersome and time consuming.

To overcome the problems of directly gifting appreciated stock, you can create a Donor Advised Fund. These are qualified, private, nonoperating foundations that pool their donations and allow donors to select qualified charities for gifts.

Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess available for future charitable gifts.

Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.