One of the most popular income tax deductions is the donation to charity. Everyone seems to know that this is a write off on their tax return and keeps track of every dollar they give away. However, not everyone knows that you can get a double benefit if you give certain types of property.
Average benefactors pull out the checkbook when they receive a request from an organization which they support. A really smart benefactor will call his/her CPA and investment advisor instead of reaching for the checkbook. This is due to the fact that taxpayers receive a deduction for the fair market value of property donated which means that a gift of appreciated property can escape the income tax.
The impact of this rule can be…well… significant, if you have securities in your portfolio which are worth more than what they were originally. This is especially true after the increase to the maximum capital gain rate from 15% to 20% took place, along with the advent of the 3.8% Net Investment Income Tax from last year. Take a look at this example below.
Benevolent Bill is in the top tax bracket and made a pledge to give $100,000 to his alma mater over four years and he had the foresight to call his CPA to make sure he did it right. Bill’s CPA knows that he has an investment account with a lot of long held securities which have basis of only 50% of their total value. If $100,000 of these securities were sold in the future it would create a $15,000 tax liability so those securities are only worth $85,000 to Bill. On top of that Bill receives an income tax deduction which saves him $40,000; making the true cost of his donation only $45,000. The alma mater however is tax exempt and those same securities really are worth $100,000 to them.
If you think you might be able to benefit from this tax saving strategy give your tax advisor at MKS&H a call. As with all tax rules there are limitations and other tax issues to consider to ensure that you receive the full anticipated deduction.
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Article Provided By Tim Stolz, CPA, MKS&H Senior Tax Accountant
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs. Please visit www.MKSH.com for more information.
