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Lower your taxes and be generous at the same time


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.

Suppose you bought stock for $1,000 in 1975 and it’s now worth $16,000. If you sold it outright, you would have a $15,000 capital gain paying 15% tax on those gains if you were in the 28% tax bracket. Thus, after paying the taxes you would have $13,750 to donate to charity (assuming no state level capital gains liability). If you had simply gifted the stock directly to the charity you wouldn’t owe the capital gains tax and the charity would get the full $16,000 in stock. You also get to deduct the FMV of the donation by giving it directly to the charity rather than selling it yourself and passing on the after-tax proceeds.

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.

This article is provided by the Financial Advisors at Benjamin F. Edwards & Co. in Chesterton, IN, and was prepared by or in cooperation with Benjamin F. Edwards & Co. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. Benjamin F. Edwards & Co. does not endorse this organization or publication. Consult your investment professional for additional information and guidance. Benjamin F. Edwards does not provide tax or legal advice.

Benjamin F. Edwards & Co., Member SIPC and FINRA

Benjamin F. Edwards & Co.
751 E Porter Ave, Suite 6 Chesterton, IN 46304
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