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How Charitable Giving Can Really Pay Off
a
my and Dennis regularly set
aside a small portion of their
budget for charitable donations. In
addition to feeling good about supporting a number of worthy causes,
they’ve been able to deduct the value
of their charitable gifts from their
Federal income tax return. Now, the
couple thinks it is time to make a
larger charitable contribution. Their
intent is to donate some stock they
purchased years ago for $1,000 that
has since increased in value to $50,000.
First, if they sold the stock, they’d
realize a gain of $49,000 ($50,000 $1,000), that would, in turn, result in
capital gains tax of $7,350 ($49,000
x 15%). Therefore, the couple’s donation would be reduced from $50,000
to $42,650, if they choose to pay the
tax from the proceeds. Or, they would
need to cover the tax with other funds.
By donating the stock directly to the
Ultimately, the money saved from
the tax deduction can be used to help
offset the costs associated with the
life insurance policy. The end result
truly is a “win-win-win” situation.
The charity wins because it receives
the full value of the stock, Dennis and
Amy win because they get a maximized charitable income tax deduction, and their children win because
charity, any appreciation in the
stock’s value is not taxed (either to
the couple or to the charity).
they eventually receive a life insurance death benefit that replaces some,
or all, of the value of the stock.
Second, the income tax benefit generated by a deduction for a charitable
gift is based on the fair market value
(FMV) of the gift and the couple’s
Federal income tax bracket. Thus,
assuming the couple is in the 28%
Federal income tax bracket, a gift of
$50,000 would result in a decrease
in their income taxes of $14,000
($50,000 x 28%). On the other hand,
a gift of $42,650 would only result in
an $11,942 decrease in their taxes
($42,650 x 28%). In effect, donating
the appreciated stock outright
produces a greater current year tax
deduction and results in a greater tax
savings than selling the stock and
donating the proceeds after taxes.
Making the Most of It
Before Amy and Dennis move
ahead, they realize that there are a
couple of issues that need to be resolved. For instance, Dennis is reluctant to make the donation because, by
doing so, he realizes their children will
not reap the benefits of the stock. On
the other hand, Amy wants to make
sure the donation is advantageous
to both them and the charity. Upon
careful review, the couple has come
up with a plan that helps alleviate
their concerns. Here’s a closer look.
The first step for the couple is to
address Dennis’ concerns. They can
do this by purchasing a life insurance
policy in an amount that is equal to
the value of the stock—that is, $50,000.
Through the life insurance, they can
help ensure that their children ultimately receive a benefit that is generally commensurate with the value of
the donated stock. They will increase
their expenses because of the policy’s
premiums, but, as you’ll soon see,
donating the stock may actually help
pay for the policy.
Next, the couple can address
Amy’s concern by donating the actual
stock to the charity, rather than selling the stock and then donating the
proceeds. There are two reasons for
this decision.
If you would like to maximize the
tax benefits of charitable giv ing, be
sure to consult a qualified tax professional. There are some limitations on
charitable giving based on the type of
gift, the type of organization receiving the gift, and your adjusted gross
income (AGI) for Federal income tax
purposes. Nevertheless, the ability to
receive an income tax deduction and
possibly replace some of the donated
wealth with life insurance makes
charitable giving pay off for you and
for the organizations you wish to
support. ?