Westmont Magazine Taking Stock of Tax Savings
by Mark Aijian
Attorney at Law, Santa Barbara, California
The stock market has been good to me this year, so I’m thinking of increasing my end-of-the-year gift to the college. What factors should I consider in order to take advantage of the I.R.S. tax code and save taxes?
There are a number of tax-advantaged gift opportunities available to investors who have seen significant capital gains on their investments. It is widely known that the difference between the purchase price (“basis”) and the current fair-market value of a security is regarded as capital gain. This paper gain is subject to the influences of the economy, Wall Street, politics, and investor perceptions.
Direct gifts of highly appreciated securities permit donors to eliminate the capital gains tax resulting from a sale of stock and a subsequent gift of the cash proceeds. In addition, the gift will avoid exit commissions to donors and entitle them to a charitable income tax deduction.
For example, a gift of appreciated stock worth $10,000 (assume a $2,000 basis) will eliminate the capital gains tax on the $8,000 gain and generate a charitable income tax deduction as large as $3,960 (assuming a 39.6 percent bracket). The capital gains tax saved would equal $2,240 (.28 multiplied by the $8,000 gain).
So a gift of cash will only generate an income tax (charitable deduction) savings of $3,960. A sale of stock followed by a cash gift will result only in a net tax savings of $1,720 ($3,960 minus $2,240) after the capital gain tax reduces the charitable deduction. However, an outright gift of stock will result in a net tax savings of $6,200 ($3,960 plus $2,240). Favorable tax reform in 1993 eliminated the gain portion on such a gift as a “preference” item for purposes of the “Alternative Minimum Tax” (AMT).
Timely action before the end of the year will ensure compliance with the IRS requirements for delivery and realize a current year deduction. Donors should always consult with their tax advisers to make sure that the securities they contemplate giving will qualify for the deductions. While ordinary long-term gain publicly traded stocks will generate the savings discussed above, there are special considerations for short-term gain and closely held securities or those with transfer restrictions.
In summary, a tax-informed direct gift of appreciated securities will generate far greater tax savings to donors who want to take advantage of current market conditions.
For more information regarding a year-end gift of stocks or other securities, check the appropriate box on the coupon on page 18 or call Iva Schatz at (805) 565-6034.
Would you like to submit a question for this column? If so, please send it to Iva Schatz at Westmont or give her a call.