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Gift to church carries tax considerations

Q: My church is in the process of a major fundraising push for an addition to our church building. The bizO-Hamil_James_BizOoverall cost is about $1.3 million and we are trying to raise as much through special gifts to reduce how much we have to borrow. My wife and I have decided to give $20,000. Last Sunday there was a financial presentation that said one way we could give was to transfer securities to the church brokerage account. It was explained that there were tax advantages to doing this. All I understood was that we could deduct the fair value of the securities. Isn’t this exactly what I deduct if I give cash?

A.Yes it is. But the benefit of gifting the securities is that if you pick securities with a fair value that is more than what you paid, you escape the capital-gains tax that would be owed if the securities were sold.

So let’s say that you have 500 shares of Yahoo stock that is worth $20,000, but which you purchased for $7,000 three years ago. You also have $20,000 of cash available to gift to the church. I’ll assume you are in a 28 percent federal tax bracket and a 4.9 percent state bracket.

You have three options. First, gift the cash. If you itemize deductions, you will reduce your tax bill by $6,580 (combined 32.9 percent tax rate times $20,000 deduction), so the gift costs you only $13,420.

Second, sell the stock to get some additional cash to ease the burden of the gift. You have a long-term capital gain of $13,000 from this sale, which costs you $2,919 in tax (based on a special 20 percent federal rate and a special 2.45 percent state rate).

You still deduct $20,000, save $6,580 from the deduction, but the capital-gains tax means the net cost of the gift is $16,339 ($20,000 plus $2,919 capital gains tax minus $6,580 tax savings).

The sell-the-stock approach costs $2,919 more than the cash gift, although this overstates the difference because if you gift cash you still own the stock and will eventually pay the capital-gains tax. The real cost is reporting the capital gain, and paying the tax, sooner than later.

The third option is to transfer the stock to the church brokerage account. This is not treated as a taxable sale, so no capital-gains tax is owed. But you are allowed to deduct the $20,000 fair value of the stock.

The net cost of option three, after the $6,580 tax benefit from the tax deduction, is $13,420. This appears to be the same as the cash gift. But by gifting the stock you will forever avoid paying the $2,919 capital gains tax on the $13,000 appreciation in the value of the stock.

Because the church is a tax-exempt organization, and will immediately sell the stock to get funds to use in its exempt purpose, the church will not have to pay any capital-gains tax.

So a gift of the appreciated stock may allow a $2,919 tax benefit in addition to the $6,580 benefit from the deduction reported on the tax return. Because this added benefit is an avoided tax, it doesn’t show up anywhere on your tax return, but it is a real saving.

The value of this benefit is hard to pin down, because it depends on when the stock would otherwise have been sold. The longer you planned to hold the stock, the longer you could have avoided the tax had it not been gifted.

So the strategy discussed at the financial presentation is a valid one, and it works best with stock that (1) has a large potential capital gain and (2) would be expected to be sold in the near term if it were not the subject of a gift to the church.

I need to make it clear that the ability to avoid a capital-gains tax by a gift does not apply when the gift is made to an individual rather than a charitable organization.

The individual recipient of the stock gift will have to pay the capital-gains tax when they sell the stock. The church avoids this tax because of its tax-exempt status.

James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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