“…a long-term strategy can help you achieve the twin goals of helping those who are less fortunate while reducing your income-tax bill.” – Dave Polstra, co-founder Brightworth
While the primary driver of charitable giving is always a compassionate heart and a desire to serve others, we are fortunate to live in a country that offers tax breaks to encourage giving to nonprofit organizations.
Structuring gifts to take full advantage of tax breaks not only reduces the “net cost” to you as a donor, but it also empowers you to consider multiplying your gift and impact.
To illustrate the power of a coordinated giving strategy, consider Jane Doe, a charitably-minded neighbor in Colorado Springs.
Jane had a profitable year and is looking to make a year-end gift to give back to the Pikes Peak community and help her favorite local charity: Springs Rescue Mission.
To make this example simple, Jane’s combined federal and state income tax bracket is 35% and her capital gains tax bracket is 20%. Additionally, let’s assume Jane already has enough deductions to itemize on her tax return, so her gift will offset her taxable income dollar for dollar.
First, let’s say Jane writes a $10,000 check to Springs Rescue Mission. The most obvious tax benefit is the deduction to her taxable income, worth $3,500 in tax savings ($10,000 times 35% income tax). So right away, the gift is only “costing” Jane $6,500 net after her tax savings.
So far so good.
But what if, instead of writing a check, Jane donated $10,000 in stock instead?
First, consider the tax implications if Jane were to sell her shares on the open market. She would receive $10,000 from the sale, but would then have to pay $1,500 in capital gains tax (20% tax on her $7,500 realized gain).
By gifting the stock, she receives the same income tax deduction for the full $10,000 market value of the stock, and the capital gain liability is eliminated if she’s held the shares for at least a year. By donating her shares, Jane saves another $1,500 in pent-up tax liability.
At this point, Jane has accrued $3,500 in income tax savings and $1,500 in capital gain tax savings, reducing the net cost of her $10,000 gift to only $5,000!
Donating appreciated assets such as stocks and bonds to charity is a great way to “double down” on the tax savings afforded by charitable gifts.
Finally, let’s consider the benefits of donating to Springs Rescue Mission through El Paso County’s Enterprise Zone.
The E-Zone is a statewide program that is designed to promote business development and nonprofit engagement within economically distressed areas throughout the state. As a qualifying charity, donations made to Springs Rescue Mission through the E-Zone result in an additional state income tax credit equal to 25% of the value of the donation for cash gifts or 12.5% for in-kind gifts (i.e. stock, equipment, services, land, etc.).
Rather than being an additional tax deduction, this is a tax credit (which is far more valuable).
So now, Jane’s $10,000 stock donation results in an additional $1,250 credit on her Colorado state income tax return (she gets a 12.5% credit since her gift was in-kind.
Let’s see what this does to her net cost of making the gift…
So, you can see that while Jane’s true net cash outlay is only $3,750, the actual gift received by Springs Rescue Mission is almost three times that amount!
And Jane’s $10,000 donation to the Mission will provide several months of addiction recovery for a man in our New Life Program or over 2,500 meals, 1,000 nights of shelter, and many other crucial services to help neighbors struggling with homelessness find housing, work and health care.
We can all be thankful that we live in a country that values and promotes charitable giving by providing tax incentives for doing so.
In Jane’s case, after looking closely at the math, she decided not only to give shares of stock but to write an additional check for $10,000 on top of that. After accounting for the additional tax savings, her net cost of making the combined gift of $20,000 is still significantly less than the $10,000 she originally intended to give.
This is a great example of how carefully structuring a charitable gift can empower you to multiply your gift and make a greater impact.
Learn more about the Enterprise Zone and how you can receive additional tax savings for your gift to Springs Rescue Mission. If you’re interested in making a stock donation through the E-Zone, please contact us today.
NOTE: The ideas shared above are only examples of effective charitable giving strategies. It’s important to discuss these matters thoroughly with your financial advisor or CPA before executing.