March 4, 2020 0 comment

Put a Third WIN on your WIN WIN Charitable Deductions with the Double-dip

This is the WIN, WIN, WIN double dip video.

I’m going to share an advanced tax planning tip.

I kind of think of tax planning in concentric rings. The closest ring are things a person can do to reduce their tax liability that are pretty easy that don’t take a lot of effort and then as you go out, kind of the muscle movement in order to achieve the next ring of tax optimization becomes more difficult. Obviously if you got a lot of money, a lot of income, it might be worthwhile to go ahead and make those big muscle movements and keep going out on those rings and capture more tax savings, but they take more effort and more time and more expense. Most of us stay here kind of in the middle on the first ring of tax planning or maybe the first two because it doesn’t make any financial sense got get too far out there. Well this is an advanced tip that can save a lot of money, but it’s easy. It’s not real difficult to do. It just takes some planning and here’s the thing about this tip, the sooner you implement the tip the more life time tax  you can save. Let me give you a little bit of background here. Where I live I work and live out of beautiful St. George, Utah. I love St. George, Utah. One thing about Utah are members of the Church of Jesus Christ of Latter-Day Saints are here in abundance and they like to pay tithing to their church and they generally pay 10%, so I got a lot of people here paying a whole lot of tithing which is a charitable contribution on your tax return, and of course I have clients all over the world and many of them also pay tithes for their churches or they make charitable donations to other organizations. It’s a big tax deduction, charitable donations are. Well here’s the thing. There are very few places in the tax code where the IRS or congress will allow a taxpayer to double dip. Meaning allow a taxpayer to get two tax benefits on the same dollar. In fact in most places the tax code, double dipping is expressly disallowed by statute. You got to make choices, one or the other. This is an area where you can legally double dipand this is what I mean. 

A charitable donation you get to deduct 100% of that donation, at least many people can deduct 100% of their donations. You know and most people make their charitable donations in cash. They write a check, whatever, or they give cash and you get to deduct that. It’s fantastic, but here’s the thing. If you were to donate not cash, but appreciated property. For instance, appreciated stock. Then you get two benefits on the same dollar. The first benefit: you don’t have to recognize the gain on the stock when you donate it. Second benefit: you get to write off the fair market value of the stock, just like you would have written off a cash donation. So you get to double dip there. 

So let me run you through a scenario to illustrate how this makes a difference for you. Lets just say you’ve got, and I’m going to use big numbers here, I’m going to assume that you love to donate to charity. Let’s use a $10,000 donation. Scenario number 1: you write a check in cash to your favorite charity for $10,000. You get to write it off. You get to deduct it as an itemized deduction and that’s fabulous for you. The second scenario: instead of writing a check for $10,000 in cash, you have a stock that’s sitting in your brokerage account that’s worth $10,000 and lets just say you bought it a long time ago and you bought it for $5,000. Well that means you have a gain sitting there in your brokerage account. You haven’t paid tax on it yet because you haven’t sold the stock yet. You’ve got a $5,000 gain. In order to make that charitable donation, if I were to sell the $10,000 worth of stock and then write the check so that I had the cash to make the donation. Well then I would pay tax on the $5,000 gain and then I would write a $10,000 check to my charity, a deduction, but I’d have a $5,000 income and then $10,000 deduction, net $5,000 deduction. Alternatively if I direct my broker to send the $10,000 worth of stock directly to the charity, now I don’t have to recognize the gain and I still get the $10,000 write off. The net benefit there is $15,000. So we went from a net benefit of $5,000 to a net benefit of $15,000 by donating appreciated stock.  Of course you can donate any other appreciated things as well. You can donate appreciated art or all sorts of things, but stock works really well. It’s really easy. It’s almost as easy as donating cash. It might even be easier. Most charities have brokerage accounts. Most charities will accept appreciated stock. No wonder, right? There’s a big tax benefit from doing it. So most charities are equipped to accept that donation. Most churches are. Anyway, great tax benefit.

This video is running a little long, but let me tell you what you can do to plan so you know you can take advantage of it. If you’re someone who makes consistent monthly or annually charitable donations and you know you’re going to be doing it for the rest of your life. For instance, if you’re a member of the Church of Jesus Christ of Latter-Day Saints and you pay tithing, you know you’re going to do it for the rest of your life. Hey why not start putting money now into a brokerage account that you reserve in order to fund that charitable donation in the future. Every month I put money into that brokerage account. At the beginning this doesn’t do me much, but 10, 15, 20 years down the road, the longer time I have, the more tax I’m going to save with this strategy because 10 years from now instead of making those tithing donations with cash, I’m going to start just making all of them with the stock that’s sitting in this account that’s now appreciated. Double dip, fantastic! So plan for it. Again, if you’re charitably minded or whatever, do this. If you’re not charitably minded, get charitably minded and do this. It’s a win, win, win. Win for the charities, win for the churches, win for you and hey it’s great and of course for tax purposes you get to double dipso do it.

That’s the tax tip. If you need my help I’ve got a lot of tax tips so contact me.