To pay the least amount of income taxes generally requires the taxpayer to know as many of the rules as possible. Knowing when and if specific actions can be taken may have a direct impact on the amount of income taxes due each year.
For charitable gifts, there are several ways these can be done. Obviously all charities still take greenbacks. But to give cash is not always the best way when it comes to taxes. If the gift is from earnings, then to give $100, at least $129 had to be earned. Reduce the $129 by Social Security and Medicare taxes paid, and then reduce it at least 15 percent for the income taxes, and the remaining is the $100 for the gift. Naturally the gift can be taken as a deduction on the annual tax return. By applying the same 15 percent tax bracket to the deduction a savings of $15 is achieved. Once the deduction is considered, it stills requires $114 to be earned to give away $100.
A second way to give the $100 is to gift appreciated property. In light of the carnage in the investment markets during the last twelve months and the decline in real estate values, gifting appreciated holdings to charities may be on the sidelines for a few years. But, just in case there are still shares of stock with a very low tax basis and a higher value, or real estate owned for years, then gifting appreciated property is still possible. While this can be done with land or collectibles, it is easiest with shares of stock since the number of shares given away can be specified and easily transferred. The value of the gift or deduction is the value of the shares when donated. Since these shares were not sold, the appreciation is not recognized on the tax return as income, but the gift can still be taken as a deduction.
Gifting appreciated items is far more efficient than gifting from earnings. In this case, a gift of $100 only cost the purchase price of what is being given away. Add in the deduction benefit, and the actual cost of the gift may be far below the value of the gift.
For 2009, Congress extended the opportunity to transfer gifts to charities directly from Individual Retirement Accounts (IRAs). Any gifts directed from an IRA account benefits the charity but the distribution is not taxed to the account holder. While there is no deduction benefit from making a charitable gift from an IRA, it may be more efficient than making a gift from earnings or other investments.
IRAs have many benefits as well as issues. While they do grow tax deferred, the account value is taxed to the recipient once the distribution is made. This is true for the current account holder or the beneficiary once a death occurs. Thus, it may be of greater benefit to make a gift from an IRA account and thus avoid ordinary income taxes on the distribution than to gift an appreciated asset whose tax rate would be the capital gains tax rate. This can be especially true for those wanting to maximize their gifts to their heirs and charities and minimize the amount paid to Uncle Sam. While tax planning in the final months or days of someone’s life may be considered a little heartless, for those wishing to make charitable gifts and have sufficient assets, the savings may be very beneficial and generally desirable of all those involved.
The best way to make a gift to a charity will depend upon individual facts. Thus, what may be best for one individual may be less efficient for another. This is due to the complexity of our tax code and the unique circumstances of every taxpayer. Thus, making the best choice will require a review of the facts for each gift by a knowledgeable professional.
I hope you will continue to support your favorite charities and make the gifts in a manner that also provide the best tax savings.