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A Charitable Gift Plan for Investors That Accomplishes Four Objectives

Posted July 2018

Let’s imagine four couples with varying incomes, each of whom purchased a hundred shares of XYZ company stock for $10,000 in early 2009 and sold their shares this year for $30,000—realizing $20,000 of capital gain. What federal capital-gain tax rate would each couple pay? And what would be the tax savings of making a charitable gift to us with that stock? Could any of the couples possibly accomplish four objectives at once: increase income, reduce income tax, avoid tax on the capital gain, and support our work?

Capital-gain tax: Zero. The first couple, Ruth and Russell, has taxable income of $75,000 and adjusted gross income of $100,000. They will pay zero tax on the capital gain because joint filers pay no capital-gain tax if their taxable income is $77,200 or lower.

Capital-gain tax: $3,000. The second couple, David and Joan, has taxable income of $140,000 and adjusted gross income of $180,000. They will pay $3,000 tax on the capital gain ($15% x $20,000). Because their taxable income is between $77,201 and $479,000, a 15% tax on capital gain applies.

Capital-gain tax: $3,760. The third couple, Paul and Sharon, has taxable income of $250,000 and adjusted gross income of $300,000. They will pay $3,760 tax on the capital gain. In addition to the basic rate of 15%, they are subject to the 3.8% Affordable Health Care surtax (total rate of 18.8%).

Capital-gain tax: $4,760. The fourth couple, Bill and Nancy, has taxable income of $500,000 and adjusted gross income of $550,000. They will pay $4,760 tax on the capital gain. The basic tax rate on capital gain for couples with taxable income over $479,000 is 20%, and the 3.8% Affordable Health Care surtax also applies.

Avoiding capital-gain tax with a charitable gift
If each couple were to make a charitable gift of the XYZ shares instead of selling them, they would avoid the varying tax on the capital gain. They would also receive a deduction for $30,000, which could reduce their income tax if they itemize.

These examples demonstrate that it is clearly advantageous for persons who will be subject to tax on long-term capital gain (gain in property owned more than one year) to make charitable gifts of appreciated assets. Assuming they itemize deductions, they realize a double tax benefit—reduction of income tax resulting from the deduction plus avoidance of tax on the capital gain.

If they have some highly appreciated stock they want to retain because they think it will continue to perform well, they might contribute the stock and use cash they might have given to us to purchase the stock—thereby stepping up their cost basis and reducing future tax on the gain if they sell the stock.

It is possible that you have stock that you acquired prior to or just after the market declines of 2008-2009, but you hesitate to lose any of the dividends or earning potential of sales proceeds. If that is the case, you could give the stock for a gift such as a charitable remainder trust that would pay life income.

A gift that achieves four objectives
Bill and Nancy, the fourth couple in the example above, combine their XYZ stock with other stock; the combination has a market value of $200,000 and a cost basis of $60,000. They contribute it to a charitable remainder unitrust that will pay them 5% of trust assets as revalued each year.

Their initial income will be $10,000—double the dividends they have been receiving from the bundle of stocks. Based on their ages of 73 and 72, they receive an income-tax charitable deduction of $90,604. At the end of their lives the trust remainder will be distributed to us and used for the purposes they have designated.

They are able to accomplish all four objectives: increase income, reduce income tax, avoid tax on the capital gain, and support our work. (Note: The example does not take into consideration possible additional savings on state income tax.)

For further information about gift plans that avoid taxation of capital gain, please contact us today.

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