3 tax reform charitable giving strategies: donating appreciated assets
Second of three-part blog series highlighting philanthropic tax-saving strategies under new tax laws
While the Tax Cuts and Jobs Act of 2017 changed important parts of U.S. tax law, donors still have many ways to maximize tax savings while making charitable gifts.
Our Blueprints blog three-part series — “3 tax reform charitable giving strategies” — highlights philanthropic options in light of the latest tax reform legislation. The first tax-saving charitable giving strategy featured the concept of bunching gifts, which may help donors who will not be itemizing deductions due to changes in the tax code.
In light of the new tax laws, another giving strategy to consider is donating appreciated assets. Many folks will find that the new legislation has made this even more tax-efficient than it was before.
Double your tax benefits
The appreciated assets I’ll address here are those that, if sold by the donor, would result in long-term capital gains tax. Think real estate and stocks, for example. For this strategy to work, the donor must have owned the asset for at least one year.
If this type of asset is donated to a public charity, such as Duke University, then the donor’s income tax deduction will be the full market value of that asset on the day that Duke receives it. Duke will then sell the property and apply the proceeds to the area at Duke chosen by the donor.
Here is the kicker: who pays the capital gains tax when Duke sells the asset? The donor doesn’t pay the tax because the donor didn’t sell the asset — the donor donated it. Duke doesn’t pay the tax either because Duke is a tax-exempt organization.
So, in a sense, the donor gets two tax benefits instead of just one: she gets the income tax deduction based on the market value of the asset, and she also avoids paying the capital gains tax she would pay if she sold the asset herself. And because Duke doesn’t pay that tax either, it’s a win-win-win!
For example: consider a gift of Apple stock. On the day that Duke received it, it was worth $100,000. The donor purchased the stock several years ago for $40,000.
Because of this gift, the donor would receive an income tax deduction of $100,000. She would also avoid paying the capital gains tax that would have been due had she sold the stock. The potential tax savings are illustrated in the chart below.
Reduce double taxation
How has tax reform made this an even more tax efficient strategy? In most states, selling stock at a gain is considered a type of taxable income, so the donor’s gain is taxed by the federal and state government. In the past, the impact of this double taxation was easily reduced because the donor was able to claim a deduction against her federal taxes for the amount of tax she paid to the state.
However, under tax reform, the amount of state and local income tax that a taxpayer may deduct against federal tax is capped at $10,000. Many taxpayers will hit this cap through real estate taxes and tax they pay on their salaries and other income. As a result, they will no longer be able to recognize a federal income tax deduction for the state income taxes realized from the sale of appreciated assets.
This inability to claim a federal deduction for state income taxes effectively increases the tax rate on the sale of capital gain assets by 1-2% in many states — all the more reason to donate those assets to charity and avoid the tax altogether! In addition, with the stock and real estate markets at high levels, it may be an even better time to consider a gift of those assets to charity.
As with all of our blog posts, the information above is general in nature. Tax laws vary from state to state and we urge you to discuss these ideas with your personal tax and financial advisors. Please contact our team of gift planning experts if you have questions about this tax saving option or if we can be helpful in any way.
Follow along next month for the final installment in our tax reform charitable giving strategies series in which we will discuss charitable gifts of IRA assets.