In the spirit of St. Patrick’s Day, pour yourself a pint and read up on some simple, yet smart, charitable giving strategies. Whether you want to support the great work of an Oscar Wilde literary foundation or an Irish heritage association, tools and benefits that align with your charitable giving goals can help to stretch your green and make a difference in the causes you care about.
Top O’ the Morning Giving: Now Rather than Later
It’s been said, “you should be giving while you are living, so you’re knowing where it’s going,” so let’s explore a few options in the case of a hypothetical Irish Iowan, Sinead O’Sullivan.
Sinead O’Sullivan intends to donate to charity eventually, at death through her will and estate plan. But why not give now? Sinead can have more say about the use of gifts while she’s alive, and also feel the joy that comes with helping worthy causes. There are also positive tax benefits for Sinead to give now rather than later. Let’s look at these potential positive tax benefits.
Faith and Begorrah: Double Federal Tax Benefit!
Gifts of long-term capital assets, such as stock, real estate, and farmland (where leprechauns may live!), can receive a double federal tax benefit.
First, Sinead can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland. Even with the increased standard deduction under the Tax Cuts and Jobs Act, this is still a valuable consideration give the value of charitable donation would exceed the standard deduction. (It would be especially beneficial if Sinead is considering “bunching” as a tax-saving strategy.)
Second, assuming Sinead owned the asset for more than one year when the asset is donated, Sinead can avoid the long-term capital gain taxes which would have been owed if the asset was sold.
Let’s look at a concrete example to make this clearer. Sinead owns shares of publicly-traded stock in Diageo (Guinness‘ parent producer and distributor company), with a fair market value of $100,000. She wants her stock to help her favorite causes. Which would be better for Sinead (a single taxpayer) to do—sell the stock and donate the cash, or give the stock directly to her favorite charities? Assume the stock was originally purchased at $20,000 (basis), Sinead’s federal income tax rate is 37%, and her capital gains tax rate is 16%.
| Donating cash versus donating long-term capital gain assets | Donating cash proceeds after sale of stock | Donating stock |
| Value of gift | $100,000 | $100,000 |
| Federal income tax charitable deduction | ($37,000) | ($37,000) |
| Federal capital gains tax savings | $0 | ($16,000) |
| Out-of-pocket cost of gift | $63,000 | $47,000 |
NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.
Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Sinead can receive a federal income tax charitable deduction equal to the fair market value of the asset and also avoid capital gains tax.
In Iowa, however, there is an even more potential tax benefit.
Saints Preserve Us: 25% Iowa Tax Credit
Under the Endow Iowa Tax Credit program, gifts made during a lifetime can be eligible for a 25% tax credit. There are only three requirements to qualify.
- The gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you).
- The gift must be made to an Iowa charity.
- The gift must be endowed – that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year – the rest is held by, and invested by, your local community foundation.
Let’s look again at the case of Sinead, who is donating stock per the table above. If Sinead makes an Endow Iowa qualifying gift, the tax savings are very dramatic. There are potentially huge tax benefits of donating long-term capital gain assets, such as stocks, real estate, and farmland while claiming the Endow Iowa Tax Credit:
| Value of gift | $100,000 |
| Federal income tax charitable deduction | ($37,000) |
| Federal capital gains tax savings | ($16,000) |
| Endow Iowa Tax Credit | ($25,000) |
| Out-of-pocket cost of gift | $22,000 |
NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.
Put another way, Sinead made a gift of $100,000 to her favorite charity, but the out-of-pocket cost of the gift to her was less than $25,000.
This is a great deal for Sinead and a great deal for Sinead’s favorite tax-exempt organizations. But, to be a smart donor you must also, of course, consider the potential areas of caution as well as the benefits.
Cautionary Ballads
The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of stock, real estate, and farmland is limited to 30% of adjusted gross income. A taxpayer may, however, carry forward any unused deduction amount for an additional five years.
Additionally, records are required to obtain a federal income tax charitable deduction. The more the charitable deduction, the more detailed the recording requirements. For example, to receive a charitable deduction for certain gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. It’s a wise idea to engage the right financial and legal professionals to be sure all requirements are met.
Endow Iowa Tax Credits are also capped – both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits, and it’s available on a first-come, first-serve basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. In fact, this year approximately $6 million in tax credits were awarded and there are no more available credits to be granted. However, you can submit your application to be placed on the waitlist for 2020 tax credits.
Endow Iowa also has a cap per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million.
Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Consult your own professional for personal advice.
Sláinte!
Our case study subject, Sinead, found the pot o’ gold at the end of the charitable giving rainbow by working with a qualified attorney who specializes in complex donations. You may not be in the same tax bracket as Sinead or have stocks valued at the same rate, but regardless, I would recommend to all donors with large gifts (especially assets of the non-cash variety). Want to discuss your giving goals and options for long-term capital assets? I offer a free consultation to all, so don’t hesitate to contact me.
