Thursday, April 27, 2017


A recent discussion with my wealthiest client about 2017 tax planning reminded me of a truly great tax strategy for charitable taxpayers with long-term capital gains.
Instead of giving cash to charity at year-end you can donate stock, bonds or mutual fund shares that you have held for more than one year and which have increased in value and save some money in the process.

This method of giving to charity has many tax benefits -

1. You can claim a deduction on Schedule A for the full market price of the investment on the date you make the donation and reduce your net taxable income. 

2. You don’t have to report the increase in value as a capital gain on Schedule D.  So you avoid the 15% or 20% federal capital gain tax.

3. If your AGI is more than $200,000 if single or $250,000 if married you avoid the 3.8% Obamacare Net Investment Income Tax (NIIT) on the gain.

4. You also will probably avoid state income tax on the gain.

5. Because the capital gain is not reported on Schedule D you do not increase your Adjusted Gross Income (AGI) and do not reduce or eliminate a variety of deductions and credits that are affected by increased AGI. 

6. Because the increase in value does not increase your AGI, if you are a victim of the dreaded Alternative Minimum Tax you will not reduce your AMT exemption.

My client, whose AGI will already exceed $250,000 without adding the potential capital gain and who generally is a victim of the dreaded AMT, wanted to donate $100,000 to charity.  Let us assume the stock he is donating has increased in value by $40,000.  By donating stock instead of cash he will save at least –

·      $26,000 or $28,000 in AMT for the deduction value of the gift (charitable contributions are deductible when calculating AMT)

·      $6,000 in capital gains tax

·      $1,520 in NIIT surtax

·      $2,600 or $2,800 in additional AMT because the AMT exemption is not reduced

·      $2,548 in NJ state income tax

Bottom line – by using this strategy the taxpayer gets the full $26,000 or $28,000 tax savings from making the contribution.  If he sold the stock first and donated the cash to the charity his net tax savings would be only $13,332 or $15,132.  The net tax savings for donating cash instead of stock would be even less if the resulting increase in AGI reduces other deductions or credits. 

The numbers would be different – perhaps greater tax savings - if the taxpayer was not subject to the dreaded AMT and in the 33% or higher bracket and/or could claim a deduction for the contribution on his state tax return.

Regardless of the amount of the donation and gain and the taxpayer’s federal tax bracket (unless 15% or 10%) there will be some savings from donating stock instead of cash to charity.  Consider this example –

Art Center has pledged $5,000.00 to his church building fund.  He also has 100 shares of Online Profits, Inc. which he purchased in 1998 for $2,000.00 and is now worth $5,000.00.  He decides to give the stock to the church to satisfy his pledge.  Art can deduct $5,000.00 on his Schedule A.  He does not have to pay tax on the $3,000.00 appreciation in the value of the stock.

If Art were to sell the Online Profits, Inc. stock and give $5,000.00 cash to the church he would have to report the sale of the stock on Schedule D and pay $450.00 in federal tax, as well as state income tax, on the gain.  Plus, the $3,000.00 gain would increase his Adjusted Gross Income (AGI), which could reduce or altogether wipe out a multitude of deductions and credits that are affected by AGI

In order for this strategy to work –

·   Any investment you donate to charity MUST be long-term property - an investment you have held for more than one year.  If you donate stock that you held for one year or less your deduction is limited to the cost basis, which in the above Art Center example would be $2,000.00.

·   Any investment you donate MUST have appreciated in value and would generate a capital gain if sold.  Do not donate an investment that has gone down in value - it is better to sell the stock, claim the loss on Schedule D, and donate the cash to charity.

And to provide the maximum tax savings you must be in the 25% or higher federal tax bracket.  If you are in the 10% or 15% tax bracket the special long-term capital gain tax is 0%.

FYI – I discuss the deduction for charitable contributions in detail in the premiere issue of my newsletter ROBERT D FLACH’S 1040 INSIGHTS – which could be yours for as little as $1.00.

If you think this tax strategy would work for you consult your tax professional.


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