Maryland Bar Bulletin
Publications : Bar Bulletin : December 2005

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The Tax Economic Effects to You and Your Charitable Donations
By Jay S. Block

Assume a donor, Phil Anthropy, wishes to donate to a public charity. For the purposes of this article, the following assumptions will apply: 1) Phil Anthropy is married, filing a joint income tax return, 2) Phil’s adjusted gross income is less than $145,950, thus no subject to a special 3 percent itemized deduction limitation rule, and 3) Phil is not subject to "alternative minimum tax".

Charitable deductions are available to reduce Phil’s personal income taxes. Would Phil be economically better off (taking into consideration available charitable tax deductions) by: a) donating property in kind, or b) selling property and subsequently donating the after-tax sale proceeds? As shown in the following comparison, Phil would be better off by $1,830 by donating $7,000 of property in kind, in lieu of selling the property for $7,000 and then donating the after-tax proceeds.

Scenario A: Phil Anthropy donates shares of stock in kind to a public charity. Assume Phil has held for more than 12 months shares of stock in a publicly-held company that is listed on the New York Stock Exchange. Assume a fair market value (FMV) of the shares is $7,000, and that Phil’s cost is $1,000. With certain exceptions beyond the scope of this article, Phil may claim the full $7,000 FMV as a charitable itemized deduction on his income tax return. Phil’s donation of the shares is not a taxable sale; Phil recognizes no taxable gain whatsoever on the difference between the $7,000 FMV and his $1,000 cost. Assuming Phil is in a 32.95 percent combined tax bracket (i.e., 25 percent Federal, plus 4.75 percent Maryland, plus 3.2 percent Howard County), then Phil’s $7,000 in kind donation of shares to a charity will reduce his income taxes by $2,306 (i.e., $7,000*32.95 percent). Phil has thus made a $7,000 charitable donation at a net after-tax cost to himself of only $4,694 (i.e., $7,000 FMV, less $2,306 tax savings).

Not that the public charity, a tax-exempt organization, can sell the shares at zero tax and utilize the full $7,000 towards its tax-exempt purposes.

  Scenario B: Phil Anthropy sells the shares, and donates the net after-tax proceeds to a public charity. Phil’s sale of the shares triggers a $6,000 long-term capital gain (i.e., $7,000 FMV, less $1,000 cost). By reason thereof, Phil incurs $1,377 of combined income taxes on the gain (i.e., $6,000 gain*22.95 percent combined tax rate, comprised of: special 15 percent Federal long-term cap gain rate, plus 4.75 percent Maryland, plus 3.2 percent Howard County). Phil donates the $5,623 net after-tax proceeds (i.e., $7,000 less the incremental $1,377 tax). The $5,623 donation reduces Phil’s income taxes by $1,853 (i.e., $5,623*the 32.95 percent combined tax bracket, as set forth in Scenario A above). In brief, the taxable sale followed by the donation of the net after-tax proceeds to the public charity results in a net $476 reduction in Phil’s income taxes (i.e., $1,377 increase in taxes by reason of the taxable gain, less $1,853 reduction in taxes by reason of Phil’s $5,623 donation).

Note that the public charity has only $5,623 to utilize towards its tax-exempt purposes.

Summary

As show in Scenario A, if Phil Anthropy donates his shares in kind to a public charity, he reduces income taxes by $2,306 while providing the charity with $7,000 to use towards its tax-exempt purposes. The net cost of the donation to Phil is $4,694 (i.e., $7,000, less the $2,306 tax savings).

Alternatively, if Phil sells the shares and subsequently donates the net after-tax proceeds to a public charity, Phil then reduces income taxes by $476 while providing the public charity with only $5,623 to utilize towards its tax-exempt purposes. The net cost of the donation to Phil under Scenario B is $6,524 (i.e., $7,000 less $476 net tax savings).

Bottom line, the above Scenario A tax savings to Phil Anthropy (of donating stock in kind) exceeds those of Scenario B (of a sale of stock with a subsequent donation of the net sale proceeds) by $1,830. Also, Scenario A yields the charity with $1,377 more to utilize towards its tax-exempt purposes than does Scenario B.


Jay S. Block is a Columbia-based tax attorney and certified public accountant with over 20 years of experience in assisting clients with tax and estate planning advice, wills/trusts, probate, tax audit representation, tax return preparation and tax litigation.

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Publications : Bar Bulletin: December 2005

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