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Gifts of appreciated stock: Let the numbers do the talking

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Gifts of appreciated stock: Let the numbers do the talking

No matter how frequently you remind clients to pause before they automatically reach for the checkbook to make their charitable gifts, many clients still give cash! As an attorney, accountant, or financial advisor, you are well aware that giving long-term appreciated assets is often one of the most tax-savvy ways your clients can support their favorite charities. Nevertheless, it’s sometimes hard to convey that message to clients with words that stick. Next time, consider using illustrations to help clients see the benefits.

 

Below are three simple examples* to help you show your clients the benefits of giving appreciated stock.

Sally and Bob Jones give $100,000

Sally and Bob Jones plan to give $100,000 to their donor-advised fund at The Community Foundation to organize all of their giving for the calendar year. Let’s assume Sally and Bob have a combined adjusted gross income of $600,000, which lands them in the 35% federal income tax bracket. If they gave $100,000 in cash to their donor-advised fund, they could realize an income tax savings, potentially, of $35,000.

What if instead of giving cash, Sally and Bob gave highly-appreciated, publicly-traded stock, valued currently at $100,000, to their donor-advised fund. Let’s assume they’ve been holding the stock for many years, and the shares have a cost basis of $20,000. Not only are Sally and Bob eligible for a potential income tax deduction that will save them up to $35,000, but they have also potentially avoided $12,000 of capital gains tax that they would have owed if they’d sold the stock (using a long-term capital gains tax rate of 15%). So, it’s easy to see why Sally and Bob should consider giving highly-appreciated stock instead of cash.

Jenny and Joe Smith give $1 million

Jenny and Joe Smith plan to give $1 million to community causes this year. They’ll do that by adding $500,000 to their donor-advised fund at The Community Foundation, which in turn they will use to support their favorite charities. They’ll also be making a $500,000 gift to an unrestricted fund at The Community Foundation to help address the region’s greatest needs for generations to come. Let’s assume that Jenny and Joe are in the highest federal income tax bracket because they earn multiple seven figures. If they were to give $1 million in cash, they could save, potentially, up to $370,000 in income tax. If they gave publicly-traded stock instead of cash, assuming a $200,000 cost basis in stock valued currently at $1 million, they would still potentially save up to $370,000 in income tax, and they would also potentially avoid $160,000 in capital gains tax (based on a long-term capital gains tax rate of 20%).

Tiffany and Brett Thomas give $5 million

Tiffany and Brett Thomas plan to give a target amount of $5 million to charity as the cornerstone of their overall philanthropy plan. They would like to use publicly-traded stock that they’ve held for many years, valued currently at $5 million. They would love to receive a lifetime income stream from these assets, so that the remaining assets will flow to their fund at The Community Foundation after their deaths. In this case, you’ll explore setting up a charitable remainder trust that pays out an income stream to Tiffany and Brett while they are both living and then to the survivor for the survivor’s lifetime.

Let’s assume that TIffany and Brett are both 55 years old. And let’s assume that the stock has a very low cost basis–just $500,000–because the Thomases have held it for so long. Depending on the IRS’s applicable rates, and assuming a 5% annual payout rate paid at the end of each quarter, here’s an approximate tax result if you worked with The Community Foundation to help Tiffany and Brett establish a charitable remainder trust:

–$1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity

–$4,500,000 in capital gains that may not be subject to tax

–$250,000 in total payments during the first year

–Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets

Following the death of the survivor of Tiffany and Brett, the remaining assets will flow to the Thomas Family Fund at The Community Foundation, which Tiffany and Brett have already established and which, upon their deaths, will split equally into two funds. The first fund will be a donor-advised fund for which their children will serve as advisors, and the second fund is an unrestricted endowment fund to support The Community Foundation’s priority initiatives in perpetuity.

Of course, no client’s circumstances will exactly match those of Sally and Bob, Jenny and Joe, or Tiffany and Brett. The net-net here, though, is that The Community Foundation is happy to discuss the various tax-savvy options for charitable giving in any client situation. Please reach out. We’re here for you! It is our honor to help you serve your charitable clients.

*These examples are for illustration purposes only. Every client’s situation is different, and therefore the tax strategy and tax impact will be different for each client. For example, these illustrations are based on federal income tax rates only, and you’ll need to evaluate, among many other factors, the impact of state taxes.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

FAQs: A snapshot of clients’ tax-time charitable giving questions

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FAQs: A snapshot of clients’ tax-time charitable giving questions

The year is in full swing. Attorneys, accountants, and financial advisors are asking clients to start gathering tax documents and related paperwork for 2023 tax returns and 2024 planning. Now is a good time for advisors to review a few basic tax principles related to charitable giving. Here are three questions that are top of mind for many advisors, along with answers that can help you serve your clients.

How important is it to high net-worth clients to get a tax deduction for gifts to charity?

Among clients who own investments of $5 million or more, 91% of those surveyed reported that charitable giving is a component of their estate and financial plans. In another study, most affluent investors cited reasons for giving well beyond the possibility of a tax deduction and would not automatically reduce their giving if the charitable income tax deduction went away. What this means for your practice is that it’s important to be aware of your clients’ non-tax motivations for giving, such as family traditions, personal experiences, compassion for particular causes, and involvement with specific charitable organizations. This also means it’s critical to talk about charitable giving with all of your clients because it’s likely that most consider it to be important.

Why do clients so often default to giving cash?

Many clients simply are not aware of the tax benefits of giving highly-appreciated assets to their donor-advised or other type of fund at The Community Foundation or other public charity. Even if they are aware, they forget or are in a hurry and end up writing checks and making donations with their credit cards. It’s really important for advisors to remind clients about the benefits of donating non-cash assets such as highly-appreciated stock, or even complex assets (e.g., closely-held business interests and real estate). When clients give highly-appreciated assets in lieu of cash, they often can reduce–significantly–capital gains tax exposure, and they can calculate the deduction based on the full fair market value of the gifted assets.

What are the basic deductibility rules for gifts to charities?

It’s important to know that the deductibility rules are different for your clients’ gifts to a public charity (such as a fund at The Community Foundation) on one hand, and their gifts to a private foundation on the other hand. Clients’ gifts to public charities are deductible up to 50% of AGI, versus 30% for gifts to private foundations. In addition, gifts to public charities of non-marketable assets such as real estate and closely-held stock typically are deductible at fair market value, while the same assets given to a private foundation are deductible at the client’s cost basis. This difference can be enormous in terms of dollars, so make sure you let your clients know about this if they are planning major gifts to charities.

So what’s the first step? Reach out to the team at The Community Foundation! We really mean it. Make it a habit to mention charitable giving to your clients. From that moment on, whatever the clients’ charitable priorities, consider our team to be your behind-the-scenes back office and support department to handle all of your clients’ charitable giving needs.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Clients want to know: What’s deductible and what’s not?

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Clients want to know: What’s deductible and what’s not?

Whether you are an estate planning attorney, financial advisor, or accountant, you’ve probably seen an uptick in client questions about tax deductions–and tax rules in general–over the last few years. Tax law changes at the end of 2017 have caused a lot of ongoing taxpayer confusion.

To be sure, your clients will be asking about charitable tax deductions as year-end rolls around. As an advisor, you’re already working with clients on financial and tax planning all year long, but fall is the time when many clients buckle down. Whether it’s the change in the weather or the imminent end of the calendar or tax year, autumn is a time to reassess things like tax loss harvesting and charitable giving. These are just two of many types of transactions that result in deductions when tax returns are filed in the spring.

Charitable giving may be especially high on the planning radar right now because of the many national fundraising initiatives that kick into gear this time of year. You (and your clients) have probably noticed that many different types of causes are celebrated each and every month. October, in health-related charities alone, is National ADHD Awareness Month, National Down Syndrome Awareness Month, Pregnancy and Infant Loss Awareness Month, Spina Bifida Awareness Month, National Physical Therapy Month, and likely many more.

Make sure your clients are aware that there are specific parameters around tax deductibility before they respond to requests from organizations and even their friends and family members who support these organizations. Your clients are relying on you as an advisor to stay on top of the rules, including:

–Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt–a status for which an organization must seek IRS approval.

–Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.

–Furthermore, even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt.

–To qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, for example, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.

–No doubt, many of your clients not only support 501(c)(3) charities, but also social welfare groups organized under Section 501(c)(4). Examples of social welfare groups include neighborhood associations, veterans organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veterans organizations).

–Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible.

If you have any questions about the tax deductibility of your clients’ contributions to various organizations, please reach out to the team at The Community Foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules.

 

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

In case you missed it: Three tax tips worth smiling about

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In case you missed it: Three tax tips worth smiling about

Energy incentive extends to nonprofit organizations

Nonprofits and other exempt entities are often left out of discussions when new tax incentives are proposed in Congress, primarily (and logically) because these organizations don’t pay tax. Fortunately, nonprofits are not left out of a recently enhanced tax provision known as the 179D deduction, which is intended to encourage incorporating energy efficiency measures into new or renovated buildings. While a nonprofit itself can’t use the deduction, of course, because it does not pay taxes, this incentive is still valuable because the nonprofit can transfer the deduction to the architect or engineer on the project who then uses the deduction.

The takeaway here? If you represent nonprofit executives or board members at organizations that have undertaken capital projects (universities, for example), you’ll want to be aware of this potential benefit, in addition to keeping up in general on sometimes tricky tax rules related to exempt entities.

This again? More crypto crack down

The ups and downs (and downs) of cryptocurrency continue! If your clients are involved in the cryptocurrency market, and especially if they are contemplating giving these assets to support charitable endeavors, be aware that the IRS continues to formalize its guidance and requirements for a qualified appraisal. Recently, the IRS confirmed that an appraisal is required to claim a deduction of $5,000 or above for a gift of cryptocurrency.

A must-know: Reviewing the QCD

You’ll recall the buzz at the end of 2022 when Congress passed sweeping omnibus legislation that included a version of the long-awaited Legacy IRA provisions that expand a tool called the Qualified Charitable Distribution, or QCD. A QCD is a financially-savvy way for your clients to support the charities they care about.

As a reminder, if your client has reached the age of 70 ½, the client may be eligible to make annual distributions of up to $100,000 from IRAs directly to an unrestricted or field-of-interest fund at the community foundation or other qualifying public charity. QCD transfers count toward satisfying clients’ Required Minimum Distributions and therefore avoid the income tax on those funds. Plus, distributed assets are no longer part of a client’s estate at death, which avoids estate taxes, too. The new law expands the QCD rules to allow for a one-time, $50,000 QCD to a split-interest vehicle, such as a charitable gift annuity or charitable remainder trust, as well as indexing the QCD cap for inflation in future years.

Punchlist: What the IRS may be up to in 2023

Advisors of philanthropic clients are keeping an eye on the IRS’s list of priorities for the fiscal year, which includes a focus on several sections of the Internal Revenue Code that impact charitable giving. The team at The Community Foundation is also watching closely, and, as always, we’ll keep you posted as issues bubble up that may lead to potential charitable giving-related legislation.

 

The team at The Community Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.