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Case Study of Gerry O’Sullivan, who saved some green



It was famous Irish writer Oscar Wilde who said, “I have the simplest tastes. I am always satisfied with the best.” Here are my best ideas about stretching your charitable dollar.

Why not give now, rather than later?

It’s been said, “you should be giving while you are living, so you’re knowing where it’s going.”

Gerry 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 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 Gerry 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, Gerry can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland. Second, assuming Gerry owned the asset for more than one year, when the asset is donated, Gerry can avoid 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. Gerry owns shares of publicly-traded stock in, say, Guinness, Inc., with a fair market value of $100,000. She wants her stock to help her favorite causes. Which would be better for Gerry – to 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),Gerry’s income tax rate is 39.6%, and her capital gains tax rate is 20%.

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 ($39,600) ($39,600)
Federal capital gains tax savings $0 ($16,000)
Out-of-pocket cost of gift $60,400 $44,400


Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Gerry can receive a federal income tax charitable deduction equal to the fair market value of the asset. Gerry can also avoid capital gains tax. In Iowa, however, there is even more potential tax benefit. Gerry can also receive a 25% state tax credit for gifts made during lifetime, lowering the after tax cost of charitable gifts even further.

Saints preserve us: 25% Iowa tax credit!

Under the Endow Iowa Tax Credit program, gifts made during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify. First, the gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you). Second, the gift must be made to an Iowa charity. Third, 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. Clearly, this final requirement is a major restriction. Still, in exchange for a 25% state tax credit, it must be seriously considered by Sinead and other Iowa donors.

Let’s look again at the case of Gerry, who is donating stock in Guinness per the table above. If Gerry 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 ($39,600)
Federal capital gains tax savings ($16,000)
Endow Iowa Tax Credit ($25,000)
Out-of-pocket cost of gift $19,400


Note well Gerry’s significant tax savings. In this scenario, by giving stock during lifetime, Gerry receives $39,600 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a state tax credit for $25,000, for a total tax savings of $80,600. Put another way, Gerry made a gift of $100,000 to her favorite charity, but the out of pocket cost of the gift to her was less than $20,000.

This is a great deal for Gerry and a great deal for Gerry’s favorite causes. But could anything be wrong with this scenario? There are four areas of caution.

 Cautionary Notes

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. You need to engage the right 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-served basis. In 2014, approximately $6 million in tax credits was available annually through Endow Iowa. So encourage clients to submit applications now, as tax credits often run out towards year end. Endow Iowa also has a cap per individual. Tax credits of 25 percent 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.

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