Save More on Taxes by Not Giving Cash
‘Tis the season to be jolly--and to be giving cash or other assets to your favorite churches, schools, museums, hospitals, community groups or other charitable organizations. December is one of the peak months for such contributions, because of the Christmas spirit and because gifts made before year-end can be deducted from your 1988 taxable income, provided you itemize.
Unfortunately, you may be among many donors who give without much thought to maximizing tax savings, or who don’t consider many attractive alternatives for giving.
Perhaps the biggest mistake most donors make is giving cash instead of stocks or other securities that have appreciated in value. Giving stocks can yield far higher tax savings, in effect allowing you to give more to your favorite organizations instead of to Uncle Sam.
Here’s how that works: Suppose you want to give $100. If you give cash, then you save $28 in taxes, assuming you are in the 28% bracket. But if, instead, you give $100 in stock that you had bought originally for $50, you not only save that same $28, you also save another $14 because giving the stock means you don’t have to pay the 28% capital gains tax applied to the $50 capital gain.
“Cash should be the last thing you give,” says Jay Steenhuysen, planned giving consultant at World Vision, a hunger-relief charity based in Monrovia. “Everybody already has taken their piece of your cash” through federal, state and local taxes, he says. “Why not give something else that hasn’t been taxed?”
What if you really like that stock and think it will go up more? Give it anyway, and use the $100 in cash that you would have given to buy new shares of the stock. Doing this will give you a $100 “cost basis” for the stock instead of $50. So if the stock goes up to, say, $120, your capital gain for tax purposes will be only $20 instead of $70. And if the stock goes back down to $50, then you have a $50 capital loss that you can use to offset against capital gains or ordinary income, reducing your taxable income. With the old stock carrying a cost basis of $50, you would have had no loss.
Daniel Rice, director of planning giving at World Vision, notes that many individuals these days are donating shares of RJR Nabisco and Kraft, two firms that are the subject of takeover offers. Those bids have sharply boosted the prices of those stocks--thus leaving holders with high potential capital gains tax liabilities that they can eliminate if they donate their shares.
Owners of closely held small businesses definitely should give stock instead of cash, Steenhuysen argues, since that stock more than likely has earned tremendous capital gains. You can use retained earnings from your business to buy back the stock, thus preserving your ownership control while also sheltering those earnings from taxation.
What if you want to give art or other collectibles that have appreciated in value? You can deduct the fair market value, but under one key condition: The recipient must use the objects as part of its charitable purpose.
So, for example, if you donate a painting, give it to an art museum that will display it. Give antique books to a library. If the organization doesn’t use the objects, you can only deduct what you paid for them, which may be far less than what they are worth.
Also, get the objects appraised by a qualified professional if they are worth more than $5,000 or if you anticipate that the Internal Revenue Service may question your valuation, suggests Conrad Teitell, a White Plains, N.Y., tax lawyer specializing in charitable contributions.
For further details on appraisals, call the IRS at (800) 424-FORM and ask for Form 8283 and its accompanying instructions. You must file this form when you claim more than $500 in non-cash charitable contributions. And while you’re at it, ask for IRS Publication 526, “Charitable Contributions.”
What if you want to make a gift of stock or cash but aren’t sure you can afford to give up the investment income that you derive from those assets?
Consider a gift annuity. This allows you to give cash or securities--sometimes as little as $1,000--to your favorite organization and receive quarterly income from it for life. The size of the payments you receive, and your tax deduction, are determined by your age. The older you are, the higher the payments. The assets become property of the charitable organization upon your death.
If you are 50, for example, you can give $5,000 and receive a tax deduction of $2,145 and quarterly payments for life of $81.25, according to Steenhuysen at World Vision. However, gift annuities don’t make sense if you are younger than 50, because the rate of return is not attractive for these people and the organization will have to wait too long to get the assets.
Another way to give cash or securities but still enjoy income is through a pooled income fund. Here your donation is pooled with other contributions into a fund that, like a gift annuity, pays you quarterly income for life. But the payments will be larger, although they may vary because the pool invests in stocks or other assets with unpredictable returns.
Because the income payments are larger, your immediate tax deduction will be smaller than for a gift annuity. A contribution of $5,000 for a 50-year-old person, for example, could result in a deduction of $708 but quarterly payments of $132.50 based on a 10.6% annual return, Steenhuysen says.
Other mechanisms that provide you with income are charitable remainder unitrusts and charitable remainder annuity trusts. These are more complex and require larger sums of as much as $50,000 or more, so they are more suited for affluent donors. The tax benefits of these could be greater than for gift annuities or pooled income funds.
If you don’t need the income and want a larger deduction, you also could set up a so-called donor advised fund, which in effect creates your own charitable foundation. You can direct how to distribute income from the assets you donate into the fund.
Larger, sophisticated charitable organizations have experts and literature that can explain these and other gift-giving options.
Be aware, however, that the IRS is playing Scrooge this year and may cut some of your tax deductions. If you give money and get something in return--a dinner, concert, books or anything else of value--you can deduct only that portion of your donation that exceeds the fair market value of the item you received.
Other ideas for charitable giving include:
* Gifts of life insurance policies. You may find that you no longer need your policy, perhaps because your spouse, children or other beneficiaries have amassed sizable assets on their own or have died. Giving the policy will allow you to deduct the amount of its cash surrender value, attorney Teitell suggests.
* Gifts of merchandise. If you run a small business, consider giving excess or close-out merchandise. Normally, you can deduct only what it actually cost you to produce the merchandise. But if the donated items are given to an organization for care of the ill, infants or the needy, you can deduct more than your cost. That deduction is equal to your cost plus half of the profit you would make when selling the items, up to a limit of twice your cost.
So, for example, if you donate inventory that cost you $1,000, and you normally sell it for $2,000, you can deduct $1,500 (your cost plus half of the profit). But if you normally sell it for $10,000, you can deduct only $2,000 (twice your cost).
* Gifts of your home. If you plan to give your home to charity under your will, consider deeding it to the charity while you are still alive. You or your survivors can still retain the right to live there for life. You get a substantial tax deduction, depending on your age and the value of your home, and you get the same estate tax benefits derived from gifts through a will.
Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
