If you itemize deductions on your tax returns, the first tangible benefit of making a gift of cash to IM ABLE Foundation today is an income tax charitable deduction for the full value of the gift in most cases. The resulting reduction in income taxes payable lowers the net cost of the gift. If you are subject to state and/or local income taxes as well as federal, the combined marginal rate (after the federal deduction for those income taxes paid) should be taken into consideration in determining the gift’s net cost.
If you don’t usually itemize deductions, you may want to consider it for any tax year in which you make a sizable charitable donation. One technique used by people who have few itemized deductions is to alternate between years in which they take the standard deduction and make few charitable gifts, and the years in which they give double their usual annual philanthropic support and shift to itemizing.
Beware of the annual limitation on the use of charitable deductions claimed for gifts to public charitable organizations, which for any specific year is 50 percent of your adjusted gross income (AGI) for cash gifts. Any unused deductible amounts can be carried over and used for up to five additional years, if necessary.
Result of an outright gift of cash
A gift by check is one of the most common methods for making an outright charitable contribution to IM ABLE Foundation. For gifts by check of $250 and more, donors must have written confirmation from the charitable donee (ie. IM ABLE), as canceled checks no longer are sufficient proof of a deductible gift at this level. Cancelled checks are acceptable for checks of less than $250. True cash gifts (not checks), regardless of the amount, must be evidenced by a receipt from the charitable organization.
To illustrate the net cost of a $1,000 cash gift, assume the gift is made by a taxpayer with a combined state and federal marginal income tax rate of 36 percent. The amount of the tax bracket, multiplied by the amount of the gift, is subtracted from the gift to determine the net cost to the donor.
36% x $1,000 = $360
$1,000 – $360 = $640
Therefore, the net cost of the donor’s gift is $640.
Many employers match their employees’ contributions to charitable causes. Ask the Human Resources office at your employer or check to see if your employer, the company from which you retired, or your spouse’s employer has a matching gift program. In most cases, your employer or former employer will provide you with a form to complete that will be sent to The IM ABLE Foundation, so as to secure your matching gift.
Using gains to achieve your philanthropic objectives: Income tax charitable deductions have become increasingly significant in reducing taxable income, particularly since tax reform has eliminated many other tax deductions.
When appreciated property held long term (owned more than one year) is used for a charitable gift and the donor would have otherwise sold the stocks for market or other reasons, two tax savings result. First, the donor is entitled to a charitable deduction for the full fair market value rather than the original cost, and second, the donor avoids the capital gains tax.
Whenever income tax deductions for gifts to publicly supported charitable organizations are claimed for gifts of long-term capital gain property, the total of such deductions that can be used in a particular year is limited to 30 percent of the donor’s adjusted gross income, rather than the 50 percent annual limitation for cash gifts. For most donors, the total deduction is typically all usable, since any unused deduction can be carried forward for five years.
Outright gift of capital gain property
As an example: Bob gives us shares of publicly traded stock he has held for more than one year. Their fair market value (the average of high and low trades for the day of the gift multiplied by the number of shares) is $12,000; their original cost, $5,000. His marginal federal income tax rate is 28 percent, and he is not subject to state or local income taxes.
The $4,410 of total taxes ($7,000 long term capital gain x 15 percent = $1,050 capital gains tax added to $12,000 x 28 percent = $3,360 income tax) avoided that the government “contributed” to the gift transaction nearly equals Bob’s net cost, and Bob has made a gift of $12,000 to his favorite charitable organization.
For Gifting of Securities please contact Scott J. Davis at Morgan Stanley Smith Barney-610-478-4500 or Scott.J.Davis@MSSB.com.