If you are a gambler, you know that there are many ways to tip your dealer. You can throw him a chip after being dealt Blackjack. If you cash out a winner, you can throw 5-10% back to the dealer as you leave your seat. My favorite way is to "play the tip." Basically, you place the tip (which is not subject to table minimums) just above your own bet. If you win the hand, the dealer's tip is also paid its winnings and your tip just doubled, or more.
As an example, let's say that I am playing at a $10 table. I can bet $10 for myself, and $2 for the dealer. The dealer will thank me for the bet and deal the cards. If I lose my hand, my $10 bet plus the dealer's $2 tip is lost to the house. If I win with a non-blackjack hand, I win $10 for my bet, the dealer's tip wins $2, and the total $4 goes to the tip jar. I win, dealer wins, everybody is happy. We would both be even more happy if I am dealt a blackjack, which pays 1.5 to 1. Instead of $10, I win $15. Instead of $2, the dealer wins $3 for a total tip of $5.
Okay, you get it? So, what does this have to do with charitable giving and tax laws? Plenty.
First my disclaimer. This is general advice. You should consult with your own financial advisor or tax professional before making any major financial decisions, including investments or changes to your portfolio. You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions. The specific investments named here are for demonstration purposes only, not a recommendation of any kind. This is not tax advice. Nor is it an interpretation of tax laws. Seek the advice a qualified tax professional.
Okay, moving along. Let's talk a bit about charitable giving. Do you give money or assets to charities? A load of clothes or furniture to the Goodwill? An annual check to your alma mater? Weekly tithing to your church?
I hope the answer is yes, some or all of the above. Anyway, we're going to assume that it is. In fact, I'm going to assume that you give $1,000 per year. $10/week at church, plus another $500 throughout the year to friends running marathons, Goodwill drop offs, and any other giving.
For most, giving is altruistic in nature. We don't do it for the tax benefit. However, if the government wants to give you a tax benefit for something that you were planning to do anyway, you would be foolish not to take advantage of it. So, for itemized tax returns, you can deduct charitable contributions, subject to limitations. For most, donations of cash or goods are fully deductible. If you are in the 28% tax bracket, a $1,000 contribution means a tax savings of $280. Good deal right? You wanted to give $1,000 to your favorite charity. They get $1,000. You get $280 back from Uncle Sam.
We're going to focus on the tax benefits here for a moment. There are a number of ways that you can make contributions to charities. You can gift goods, like the clothes and furniture to the Goodwill example. You can create charitable trusts which either give the charity the income of the trust or the remainder interest in the trust. This is far more complicated than I care to get here. You can also gift stock or other securities. It is this last one that I would like to focus on.
Generally, the tax treatment of a gift of stock is that the donor gets to deduct the fair market value as of the date of the donation. This is a tremendous benefit in the case of highly appreciated stock. Let's say you invested $3,000 in ABC Inc. five years ago, which is worth $10,000 today. If you make a contribution of all of the shares to a qualified charity, you get a deduction of $10,000. If you are in the 28% tax bracket, this means a tax savings of $2,800. This is limited by your income, other deductions, and a host of other issues. So, again, see your tax advisor.
If, instead of donating the stock, you cashed out and donated cash, you would have to pay 15% long term capital gains tax on the $7,000 gains before donating cash. After paying $1,050 in taxes, you would only have $8,950 to donate. Assuming the same tax bracket, your tax savings would be $2,506. The value to your favorite charity is reduced, and the tax benefit to you is reduced. Not good all around.
It is clear that donating shares of appreciated stock seems to be a good way to donate to charity. But what if you invest in stock with the intention of donating said stock to charity after it appreciates, only to see it decline? Well, there are tax benefits there too.
Let's say you invest $1,000 in a high flier, hoping to see it double, making a nice sum to give to your alma mater. Instead is nose dives 50%. Now with only $500, you sell, and donate the remaining amount to your school anyway. What are the tax implications? If you have capital gains, they will be offset by these losses. But let's assume that you don't. You can use up to $3,000 in capital losses to offset ordinary income, carrying the remainder over to subsequent years. In this example, the $500 would be deductible against ordinary income (remember, we are assuming that you don't have any capital gains). The $500 capital loss would net a tax benefit of $140, and the $500 donation of the proceeds would net a tax benefit of $140. The total tax benefit of $280 is the same as if you donated $1,000 cash.
What if the high flier goes up? Let's say it double as you hoped. 12 months later (it has to be long term gains), you donate the stock to your school. How much tax benefit do you get? Well, remember that you get to deduct the full fair market value, or $2,000. At the 28% tax bracket, your tax benefit is $560.
So, let's break down the three possible scenarios assuming $1,000 to donate, 28% tax bracket, 12 month holding period for investment scenarios.
- Donate $1,000 cash. Tax benefit, $280
- Invest $1,000, stock drops 50%. Take $500 loss, donate remaining $500. Tax benefit, $280.
- Invest $1,000, stock doubles. Donate $2,000 worth of stock. Tax benefit, $560.
In the end, you are not bearing the risk, your charity is. Yet you stand to benefit from a larger tax deduction.
It's like playing the tip. You were planning on making a tip in a specified amount. If you win, the dealer gets double. If you lose, the dealer loses. Either way, the impact to you is the same. Is there a downside? I don't see one. I don't know, you tell me.
Again, the disclaimer: This is general advice. You should consult with your own financial advisor or tax professional before making any major financial decisions, including investments or changes to your portfolio. You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions. The specific investments named here are for demonstration purposes only, not a recommendation of any kind. This is not tax advice. Nor is it an interpretation of tax laws. Seek the advice a qualified tax professional.
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