The prospect of paying capital gains tax sometimes prevents people from making sound investment decisions. The thought of losing almost a quarter of the gain because of taxes often leads to inaction.
There is an opportunity, however, to unlock those appreciated investments without paying any capital gains tax and utilize their full value for good.
When gifts of appreciated property, such as stocks, bonds, real estate, and oil and gas and business interests, are given to charity, no capital gains tax is paid by either the donor or the tax-exempt charity. In addition, the donor receives an immediate income tax deduction for the value of the donated property. This double savings of income and capital gain taxes makes such gifts the most cost-effective way of supporting charity.
Capital Gains Tax Rates
When selling an investment that has increased in value, a capital gains tax is due based the amount of appreciation. If the investment has been held for more than a year, long term capital gains tax will be due upon sale. If held less than a year, gains are taxed as ordinary income. The amount of capital gain tax will depend upon the seller’s income. For married couples who earn more than $501,600 in 2021, the tax will be 20% of the gain plus a 3.8% net investment surtax. If income is between $80,800 and $501,600, the tax rate is 15%. The 3.8% net-investment surtax is applied on income of $250,000 or more.
The Impact of Giving to Charity
A person who makes a $100,000 gift of cash and is in the top tax bracket of 37% can deduct the $100,000 gift and save $37,000 in taxes ($100,000 x 37%). The tax savings reduces the cost of the gift to $63,000.
With a gift of an appreciated asset worth $100,000, which has a cost basis of $10,000, the cost of the gift is reduced even further. The person will take a $100,000 charitable deduction, saving $37,000 in taxes. Since no capital gains will be paid on the appreciated asset, an additional $21,240 in capital gains taxes will be avoided ($90,000 x 23.8%=$21,240.) The result is that the cost of the gift is further reduced to $41,760 ($100,000-$37,000-$21,240=$41,760.)
Capital Gains Rates Likely to Rise
President Biden proposed during the presidential campaign increasing the capital gain tax rate for individuals making $1 million or more to 39.6%. Such a provision may be part of any tax legislation introduced in the coming months.
The incentive to make gifts of appreciated assets remains strong. Consider the advantages of giving assets that have increased in value and unlock capital gains for good.
Give Us a Call to Discuss Gifts of Appreciated Property
Gifts of appreciated assets require some planning. We are available to help with the transfer of such assets. We would be happy to talk by phone, exchange email or set up a time to have a video chat during this pandemic.
About the Author
Since 2000, Randy has served as Director of Planned Giving for Southwestern Medical Foundation and UT Southwestern Medical Center. He works with donors to suggest bequest language to share with attorneys, establish charitable gift annuities and charitable remainder trusts, utilize beneficiary designations for retirement plan accounts and explore gifts of other non-cash assets like real estate and life insurance. After receiving a Masters of Divinity degree from Vanderbilt University, Randy began a career in development, working in higher education, the arts and in academic medicine. He received the Chartered Advisor in Philanthropy designation (CAP) through the American College of Financial Services.
To contact Randy Daugherty, please call (214) 648-3069 or email him at firstname.lastname@example.org.