CHARITABLE CONTRIBUTIONS With a Little Planning You Can Save a Lot of Taxes

ROBERT A. STEINER [*] Tax Planning NOW IS THE TIME to start thinking about your income taxes for year 2001. Early in 2001 you necessarily have to think about your income taxes for the year 2000. Do your homework. Assemble your records. Report all your income. And, of course, take all your lawful deductions. However, big tax savings can take place if you do some tax planning. Let us look at the benefits of planning ahead. Suppose You Want to Contribute $1,000 to the International Society for General Semantics (ISGS) Example One You contribute $1,000 in cash to ISGS. On your income tax return you itemize deductions. You take a deduction for the contribution. That reduces your income taxes by $1,000 multiplied by your marginal tax rate. Your marginal tax rate refers to the top income tax bracket affecting your income. We have a progressive (what a delightfully political synonym for escalating tax rates) income tax system. The top rate at which your income is taxed is referred to as your marginal rate. Let us assume that rate to be 35%. If you were to earn an additional $1,000 in taxable income, that would increase your income tax by $350 ($1,000 x 35% = $350). If you create an additional deduction that reduces your taxable income by $1,000, that reduces your income tax by $350. When we talk about reducing your taxable income, we simultaneously talk about reducing both your federal income tax and your state income tax. A word about tax rates: As I write this article, in addition to keeping my nose to the grindstone and my shoulder to the wheel, I am also keeping my ear to the ground. Please pass the liniment. Hark! I hear talk of an imminent tax cut. They say (and we all know who they are) that 1) the tax cut will be passed and signed into law during 2001, and 2) it will be retroactive to January 1, 2001. Consequently, contrary to my original intent for this manuscript, we shan't give any more examples with percentages that represent income tax rates. Example Two In 1993, you bought 100 shares of Widget Corporation at just under $3.00 per share. Adding broker's commission, the purchase price totaled $300. It has gone up considerably. It is now worth just over $1,000. You sell it, and donate the entire proceeds to ISGS. After deducting commissions, the net proceeds amount to exactly $1,000. (Hey, it's my example. I can make it come out even if I wish.) When you sell the stock, you will pay, tax on the $700 Capital Gain ($1,000 net sale proceeds minus basis [cost plus expenses of purchase] of $300). Then, when you donate the $1,000 proceeds to ISGS, you will get a deduction of $1,000. Since the Capital Gains Tax Rates are lower than the Ordinary Income Tax Rates (applied to the deduction), you will have a net income tax gain on the transaction. This Example Two was good tax planning, right? Wrong! See Example Three. Example Three Slow down! Look at your options. Think about it. Read this article. Talk to your tax advisor. Instead of selling the stock and donating the cash, as you did in Example Two, what happens if you donate the stock directly to the charity? You are not taxed on the $700 appreciation on the stock! You will pay Capital Gains Tax of ... Zero! True! You do not pay any tax at all on the appreciation of the stock to the date of the contribution! And you get an income tax deduction for the full value you donated. That amounts to more than $1,000. Since you donated the stock rather than selling it, there is no broker's commission deducted from its value. That means that your appreciation on the stock was more than $700 ... and it was not taxed at all. Thus, with a bit of knowledge and prudent tax planning, you got a higher tax deduction, gave a larger donation to ISGS, and eliminated the entire Capital Gains Tax on the appreciation on your stock. …