Saturday, April 12, 2014

How to Get Government to Subsidize One's Favorite Charity (Updated the links.)

April 15 is next week.  Ugh.  However, a couple I know made a gift last year to their church, and the government will reimburse them this year a substantial portion of the value of their gift.  They could have paid the gift in cash and received part of that reimbursement.  Instead of paying cash to their charity, however, they made a donation of marketable securities (common stock in this case), securities that had appreciated in value between the time they purchased those securities and the time of their donation.  This increased the government's reimbursement.  Finally, the couple did not have to deal with a single government bureaucrat, but with people who liked them and wanted to serve them, the church treasurer, their accountant who prepared their tax return, and their stock broker.

The reimbursement from the government came in the form of the "tax benefits" that they will use this year with respect to the gift they made last year.  That is to say, they will pay less in income taxes next week than they would have paid had they not given the stock to their church.  The benefits arose from the application of two provisions of the Internal Revenue Code.

The first provision applies so that a gift of appreciated stock will avoid the income tax that the couple would have paid on the capital gain, had they sold the stock first and then donated the net cash proceeds of the sale.  The fair market value of the stock at the time of the gift to the church is the value of the gift that they may claim as a charitable deduction on their income tax return.  They are not required to offset that value by the tax they would have had to pay on the capital gain.

The second provision applies so that  the couple may deduct the value of their gift in computing their taxable income.

What is the extent of the government's reimbursement?  I do not have the couple's tax return to review, so I cannot tell you precisely.  But I can refer you to this discussion on the Fidelity Charitable website, to this discussion at that site and, finally, to this page where Fidelity Charitable will crunch the numbers for you.  (Incidentally, using Fidelity Charitable's  services for making charitable gifts greatly simplifies the process of obtaining the government's reimbursement.)

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