Published:
No Comments

GIVE MORE TO YOUR CHURCH* & PAY LESS IN TAXES

OLYMPUS DIGITAL CAMERA

*Or another favorite nonprofit

Might this be a good time to consider being more generous to your church? Allow me to offer up 4 tips which could allow you to give more to your church and pay less in taxes.

Tip 1: Consider All Your Assets

You need to consider all your assets to give smart. Don’t just consider cash but look at your entire basket. Allow me to illustrate with three real-world examples.

  1. I know a farmer. He doesn’t have a lot of cash on hand – we’ve all heard the phrase, “land rich, cash poor.” But farmland itself can be a very tax-savvy gift. So can gifts of grain.
  2. I know a young person who’s self employed. Again, not lots of cash on hand. But this young person inherited an IRA from a relative, and must make annual required minimum distributions [RMDs]. IRA RMDs can be a tax-wise gift.
  3. I also know a couple who recently retired. The couple has three life insurance policies, which made lots of sense when their kids were younger. Their kids are now grown up and successful on their own. It may be that a paid up life insurance policy could be signed over to their favorite charity.

Your individual facts and circumstances are unique. Consider seeking personalized counsel to look at your whole basket of assets.

Tip 2: Consider Long-Term Capital Gains Property

Gifts of long-term capital assets, such as publicly traded stock and real estate, may receive a double federal tax benefit. First, donors can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock or real estate.

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 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.

I wrote all about record keeping requirement for the federal income tax charitable deduction. You can read it here.

Second, assuming the donor owned the asset for more than one year, when the asset is donated, the donor 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. Pat owns stock with a fair market value of $1,000. She wants to use the farmland to help her favorite causes. Which would be better for Pat? To sell the stock and donate the cash? Or gift the stock directly to her church? Assume the stock was originally purchased at $200 (basis), Pat’s income tax rate is 39.6%, and her capital gains tax rate is 20%. 

Donating cash versus donating long-term capital gain assets, such as publicly traded stock Donating cash proceeds after sale of stock Donating stock directly
Value of gift $1,000 $1,000
Federal income tax charitable deduction ($396) ($396)
Federal capital gains tax savings $0 ($160)
Out-of-pocket cost of gift $604 $444

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 or real estate, made during lifetime, can be doubly beneficial. The donor can receive a federal income tax charitable deduction equal to the fair market value of the asset. The donor can also avoid capital gains tax. In Iowa, however, there is even more potential tax benefit. Donors can receive a 25% state tax credit for gifts made during lifetime, lowering the after tax cost of charitable gifts even further.

Tip 3: Consider Endow Iowa Tax Credit Program

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 (i.e., 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 Iowa lawyers and donors.

Tip 4: Combine the First Three Tips!

Let’s look again at the case of Pat, who is donating stock per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are dramatic:

Tax benefits of donating long-term capital gain asset with Endow Iowa
Value of gift $1,000
Federal income tax charitable deduction ($396)
Federal capital gains tax savings ($160)
Endow Iowa Tax Credit ($250)
Out-of-pocket cost of gift $194

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Note well Pat’s significant tax savings. In this scenario, Pat receives $396 as a federal charitable deduction, avoids $160 of capital gains taxes, and gains a state tax credit for $250, for a total tax savings of $806. Put another way, Pat made a gift of $1,000 to her favorite charity, but the out of pocket cost of the gift to her was less than $200.

Of course, all Iowans are unique and have unique legal and tax challenges. Consult your own professional advisor for personal advice.

Gordon Fischer Law Firm, P.C. is dedicated to promoting and maximizing charitable giving in Iowa. Gordon can be reached by phone at 515-371-6077; by email at gordon@gordonfischerlawfirm.com.

####

Leave a comment

Your email address will not be published.
*
Some HTML is ok.
*
*