Lower Your Taxes and Be  Generous At The Same Time

Aimee A. Helms, AAMS®

Vice President, Investments

Benjamin F. Edwards

Tax season can be a painful reminder that you’re paying more taxes than you’d like and you want to find a way of reducing them. Here’s a surprising one: Be more generous.

The Internal Revenue Service code provides different ways to lower your tax bill by being charitable. Among the many vehicles for doing so are charitable trusts, family foundations, interests in a residence, and life insurance. One of the more effective strategies is to donate shares of stock or other securities that have increased in value.

Such a donation may help lower your capital gains tax exposure and lower the overall taxes to be paid on your estate. According to IRS rules, when you donate stock or other assets classified as “intangible long-term capital gain property” to a qualified public charity, you can deduct the full Fair Market Value (FMV) of the property, as long as that amount isn’t more than 30 percent of your Adjusted Gross Income. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.

For example, let’s say you donate stock with a cost basis of $10,000 and a current FMV of $50,000 to a public charity and that your AGI for the year is $100,000.

That means the maximum deduction for the present year is $30,000 (30 percent of $100,000), leaving the balance – or $20,000 – available for a deduction on next year’s return. You avoid paying capital gains tax on the $40,000 appreciation in value had you just sold the stock. You also reduce your taxable estate by $50,000 in the year the gift is given and remove potential growth of these assets from your taxable estate.

What’s especially valuable about this method of being charitable is that you’re giving more to the charity and saving more on your tax bill than if you merely sold the stock (paying taxes on the capital gain) and donated the proceeds to the charity.

Keep in mind that such donations are governed by very specific rules. Also, certain types of property may be more advantageous to donate to charity than others. For help making well-informed decisions, speak with your financial advisor and tax professional about your investment objectives and charitable goals.