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Increase Your Tax Savings with Charitable Gifts
Did you know that charitable gifts might help you save on taxes in multiple ways? Donations may be income tax deductible and exempt from gift tax; and, with a proper strategy, you may be able to reduce capital gains taxes as well.
If you expect to have capital gains this year, consider donating shares of appreciated stock or mutual funds to charity instead of writing a check. You may be able to deduct the current market value of the gift for income tax purposes (subject to limitations covered above) just as if you had made a cash payment. As an added advantage, you might escape any capital gains taxes you would have owed if you had sold the assets instead, assuming you held the assets for more than one year and gift them to certain qualified charities.
The transfer of ownership to a charity is easy. Simply ask your financial institution to transfer the assets to an account in the name of a charity. To be effective for income tax deduction purposes, the transfer will need to be made before year-end.
What if you still like all of the appreciated investments in your portfolio? Instead of sending, say $1,000 to a charity and keeping all your appreciated stock, consider gifting $1,000 worth of stock and using the $1,000 in cash to buy new shares. You could continue your investment in the stock but have a higher tax cost basis than your original stock which may reduce the capital gain whenever you ultimately do decide to sell.
Say you are giving only part of a particular holding away. If you bought shares at different prices, you can increase your tax savings by gifting the lot with the lowest cost basis. However, if you have ever applied the average cost method to calculating gains on sales of mutual fund shares that you are gifting you must continue to use that approach. If you do not specify which shares to give, the IRS assumes that you gifted the shares that you owned the longest.
There is a provision in the tax law that limits the total charitable contributions you may claim in a tax year. You may deduct gifts to public charities up to 50% of your "contribution base" - generally your adjusted gross income - if you made in cash, and up to 30 % if made in long-term capital gain property. Cash gifts to private foundations are deductible up to a limit of 30 % of your contribution base and gifts of long term capital gain property are deductible up to 20%. To the extent an allowable deduction is not fully used in the year you make the gift, due to these limitations, you may carry forward the deduction for up to five succeeding years.
Some additional points are worth noting:
- The deduction for a gift of assets owned for less than one year is the lower of adjusted cost or market value.
- Contributions of long-term appreciated publicly traded stock to private (non-operating) foundations generally are deductible at full fair market value. All other gifts of property, closely held stock and real estate, for example, are deductible at cost basis.
- It might not be advantageous to make charitable gifts of assets held at a loss. Consider selling the assets, realizing the loss on your tax return, and writing a check to the charity.
Smith Barney does not provide tax or legal advice. Consult your legal and tax advisors with regard to the income, gift, and other tax consequences of any of these strategies.
Smith Barney is a division of Citigroup Global Markets Inc. Member SIPC
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To make a charitable gift to Arizona Greyhound Rescue, please contact:
David Hum
Portfolio Manager/Financial Consultant/Financial Planning Specialist
Smith Barney
5255 E. Williams Circle - Suite 5000
Tucson, AZ 85711
(520) 745-7026
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