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Archives for December 2016

Donating Appreciated Property for Tax Savings

Clients are always asking me for tax saving measures to take before the end of the year.  While most suggestions involve spending money to get a dollar for dollar deduction (cash donations to charity, increased retirement plan contributions, etc.), the Internal Revenue Code offers a creative planning opportunity.

If you own appreciated property (stock in this example), you can get a deduction for the value of this property if you donate it to a qualified charity.

Let’s look at a simple example:

  • 1,000 shares of XYZ Company stock purchased for $10/share in 1990 (total cost = $10,000)
  • Assume shares of XYZ Company stock are currently selling for $100/share (total value = $100,000)
  • If we stop right here we can see that the taxpayer has an unrealized long-term capital gain of $90,000. Assuming the taxpayer is not in the highest marginal income tax bracket, selling the stock would result in a $13,500 ($90,000 x 15%) tax hit.
  • Instead, let’s assume the taxpayer donated the stock to the LSU Foundation. Let’s also assume the taxpayer’s marginal tax bracket is 33%.
    • The taxpayer would receive a $100,000 charitable donation deduction which would save $33,000 in Federal tax ($100,000 x 33%)
    • Effectively the taxpayer has converted a $10,000 investment into $33,000 of Federal tax savings. Did I mention that $0.00 gain is recognized on this transaction?  Not only do you get a deduction for the fair market value of the property, but the unrealized gain is not recognized.  It simply goes away.

The example above is meant to be a simple one (i.e. does not consider phase out of itemized deductions or the 30% AGI limitation used when donating appreciating stock) but the point is clear.  Donating appreciated stock (assuming the taxpayer’s alternative is donating cash/check) is a great way to save income tax without depleting cash.

 

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Louisiana Technology Donations can be Big Tax Savings

Most taxpayers are aware of the benefits of making charitable donations.  It’s pretty simple in most cases.  You give to a charity and you get a charitable donation deduction that saves Federal income tax at your marginal tax rate.

For example:  If you donate $10,000 and you’re in the 28% tax bracket, you save $2,800 of Federal tax.  Pretty simple right?

The state of Louisiana offers a type of donation that works like the example I described above, but also offers substantial Louisiana income tax savings.  This deduction applies to donations (of a technological nature) made to educational institutions.  What’s really cool is that Louisiana gives you a 29% credit (to the extent you have Louisiana income tax) that reduces your Louisiana income tax dollar for dollar.  This credit combined with the Federal tax savings from the charitable deduction can be huge.

Let’s take a look at an example:

  • $10,000 donated to a local high school toward the purchase of new servers
  • Taxpayer ‘s marginal Federal tax rate is 33%
Federal tax savings                          $3,300 ($10,000 x 33%)
Louisiana tax savings                      $2,900 ($10,000 x 29%)
Total tax savings                               $6,200 ***

***Simple example above ignores the small Louisiana benefit from the charitable contribution deduction.

The total tax savings of $6,200 provides tax savings at a 62% clip.  That’s huge!  I can’t think of many other situations where making a tax move saves 62%.

To make the donation you should contact an educational institution (school)  and inquire of their technology needs.  Given the popularity of this tax saving donation, many schools begin developing a “wish list” of technology items as year end approaches.  Simply making a cash donation toward the purchase of technology will suffice.  I’ve seen schools list “partial payment…” as the description of the items donated on Form R-3400 (more on form below).

Once the donation is made, the school is required to provide Form R-3400 “Certification of Donation or Contribution of Property of a Sophisticated and Technological Nature.”  This form, along with copies of the invoices of the items donated (if not cash) or items that will be/have been purchased with your donation (cash) should be attached to your timely filed Louisiana individual income tax return to substantiate the donation and ultimate credit received.

If you’re charitably inclined, a Louisiana resident,  and looking to reap big tax savings before year end, you should definitely be considering making technology donations to a local school. Contact Us. 

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