By Bruce Martin
Most of us know that donations are tax deductible, but few of us understand exactly what that means. The mere thought of adding more items to our tax forms makes many of us uncomfortable, but a little understanding of how the system works and some sound advice can help reduce our taxes and redirect those dollars from federal spending priorities to our own. In effect, the Internal Revenue Code (IRC) permits us to choose between giving money to the U.S. Treasury or to our favorite tax-exempt organization, so that what actually comes out of our pocket can be as little as fifty cents on the dollar.
Two trips to DGH in El Salvador, including a nervous weekend as an international observer of El Salvador's second post-war elections, have convinced me of the merits of taking advantage of this opportunity to control how our money is spent. The following four tax saving basics allow you to save on your taxes and put your money to speak for your values:
1) Generally, contributions to charities are deductible on your 1040 and on state income tax returns. Let's say the combined federal and state rate at which your income is taxed is 40 percent. That would mean that 40 cents of every dollar you give to charity is money that you would otherwise be paying to federal and state governments as taxes.
2) The deduction allowed for gifts of an appreciated security is usually the fair market value at the time it is donated, not at the time it was bought. Let's say you paid $5,000 for 100 shares of stock and that stock is now worth $7,500. If you cash it in, you'll have to pay Uncle Sam capital gains tax on the $2,500 dollars the stock went up (28% of $2,500 = $700). But, if you give the stock to charity, you can deduct the full $7,500 without paying any capital gains tax.
3) Gifts to charity are also 100 percent deductible against federal estate tax (FET). Uncle Sam doesn't stop at taking your money while you live - he also takes a rather large slice (as high as 55 percent or more) of what you leave your children or loved ones after your death. So if you were wealthy and willed cash or appreciated assets (stocks, bonds, etc.) to charity, 50 cents or more of every dollar you gave would otherwise go to the federal government.
4) Finally, if you make a gift to charity now of money or assets you never expect to use anyway, you also save the federal estate tax on the interest or increase in value that money or asset would have generated during your remaining life. Let's take an extreme example. Assume I paid $25,000 in 1985 for an investment worth $50,000 in 1997. I then sell the investment in 2006, one year prior to my death, for $75,000. Assume I will the remainder of that sum after taxes to my children. How much of the $75,000 do they get?
The capital gain tax on the $50,000 the investment had earned when it was sold in 2006, is $14,000 ($75,000 - $25,000 x 28% = $14,000). The rate of estate tax on the remainder could be 50 percent or $30,500 ($75,000 -$14,000 x 50% = $30,500). Therefore, my children are left with $30,500 from that $75,000 asset.
On the other hand, if I had given the investment to charity in 1997, I would have gotten a $50,000 income tax deduction that, if I am in the 40 percent tax bracket, would have saved me $20,000 on my 1997 income tax. So Uncle Sam would be out $44,500 ($30,500 PET + $14,000 capital gains tax); my children would get $30,500 less; and the charity would have an asset worth $75,000.
Of course, none of these tax saving considerations can equate with the personal satisfaction of seeing the benefit your donations provide. But if you are interested in knowing more about the tax advantages of donating money or other assets to DGH, I would be happy to discuss them with you. I am an attorney and DGH Advisory Committee Member, who has volunteered to help establish an endowment, "split interest" charitable giving opportunities and other asset donation assistance for those interested in supporting DGH in this way. You can contact me at: officebmartin@earthlink.net.
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