$30K Tax Savings with Strategic Charitable Giving

$30K Tax Savings with Strategic Charitable Giving

Executive Summary

A high-net-worth client sought to substantially increase their annual charitable contributions while mitigating the associated tax burden. Golden Door Asset recommended a multi-faceted approach leveraging cash donations, strategically selected appreciated stock donations, and the establishment of a donor-advised fund (DAF). This comprehensive strategy not only allowed the client to achieve their philanthropic goals but also resulted in significant tax savings, generating a positive ROI and a $30,000 reduction in their overall tax liability.

The Challenge

Our client, a successful entrepreneur with an adjusted gross income (AGI) of $600,000, expressed a strong desire to increase their annual charitable giving from $15,000 to $60,000 – a fourfold increase. While passionately committed to various causes, they were understandably concerned about the impact of such a significant increase on their tax obligations. Historically, they had simply written a check to their preferred charities, which, while commendable, was not tax-optimized. The client’s existing financial advisor had suggested simply increasing cash donations, which would only provide a limited benefit due to AGI limitations on cash contributions (typically capped at 60% of AGI).

Furthermore, the client held a significant amount of stock in a publicly traded company that they had founded. These shares had appreciated substantially over the years, resulting in a large unrealized capital gain. Selling these shares to fund the increased charitable giving would trigger a significant capital gains tax liability, further diminishing the net benefit of their generosity. The challenge was to find a way to maximize the tax benefits of charitable giving without incurring substantial capital gains taxes or exceeding AGI limitations. The client's primary concerns were: 1) Minimizing the overall tax impact of the increased charitable giving. 2) Effectively utilizing highly appreciated assets without triggering substantial capital gains taxes. 3) Establishing a sustainable and tax-efficient framework for ongoing charitable contributions.

The Approach

Golden Door Asset devised a strategic plan incorporating several key elements to address the client's concerns and maximize the tax benefits of their charitable giving:

1. Donation of Appreciated Stock: We recommended donating highly appreciated stock directly to qualified charities. This allows the client to deduct the fair market value of the stock at the time of the donation, up to 30% of their AGI, while simultaneously avoiding the capital gains tax they would have incurred if they had sold the stock and donated the proceeds. We identified $40,000 worth of stock with a cost basis of $10,000 as a prime candidate for donation.

2. Cash Donations: To supplement the stock donation, we advised the client to make cash donations to their most favored charities. While subject to the 60% AGI limitation, the cash donations would further increase their total charitable deduction. We determined that a $10,000 cash donation would be an appropriate amount, taking into consideration the AGI limitations after the stock donation.

3. Establishment of a Donor-Advised Fund (DAF): To further optimize their charitable giving and create a more strategic long-term plan, we recommended establishing a donor-advised fund (DAF). This allowed the client to front-load several years' worth of charitable giving into a single tax year, potentially exceeding the annual AGI limitations and carrying forward the excess deduction for up to five years. The DAF also offered the benefit of allowing the client to recommend grants to various charities over time, providing greater flexibility and control over their philanthropic impact. We advised an initial contribution of $10,000 to the DAF.

4. Tax Optimization Strategies: We modeled various scenarios, including different combinations of cash and stock donations, to determine the optimal strategy for maximizing the tax benefits based on the client's specific financial situation and AGI. We also considered the potential impact of other deductions and credits to ensure a holistic approach to tax planning.

Technical Implementation

The technical implementation involved a detailed analysis of the client's financial situation, including their income, assets, and existing tax deductions. We utilized IRS Publication 526, which outlines the guidelines for charitable contributions, to ensure compliance with all applicable regulations.

• Appreciated Stock Donation: We worked closely with the client's brokerage firm to facilitate the direct transfer of the appreciated stock to the qualified charities. We ensured that the stock had been held for more than one year to qualify for long-term capital gains treatment and that the charities were eligible to receive tax-deductible donations. The fair market value of the stock at the time of the donation was meticulously documented for tax reporting purposes.
• Cash Donation Tracking: We recommended meticulous record-keeping of all cash donations, including the date, amount, and name of the recipient organization. We also ensured that the client received written acknowledgements from the charities for all donations exceeding $250, as required by the IRS.
• Donor-Advised Fund Management: We assisted the client in selecting a reputable donor-advised fund provider with low administrative fees and a wide range of investment options. We helped them complete the necessary paperwork to establish the DAF and transfer the initial contribution. We also provided guidance on the investment strategy for the DAF assets, taking into consideration their risk tolerance and philanthropic goals. We also planned for annual minimum distributions.
• Tax Calculation & Modeling: We used advanced tax planning software to model the impact of the charitable donations on the client's overall tax liability. We considered the AGI limitations on charitable deductions, the potential for carrying forward excess deductions, and the interaction with other tax deductions and credits. We also modeled alternative scenarios to determine the optimal mix of cash and stock donations for maximizing the tax benefits. Specifically, we calculated the deductible amount of the stock donation ($40,000 fair market value - $10,000 cost basis = $30,000 gain avoided). We then factored this into the overall charitable deduction calculation, along with the $10,000 cash donation and the $10,000 DAF contribution, ensuring that the total deduction did not exceed the AGI limitations.

Results & ROI

The strategic charitable giving plan generated significant tax savings and a substantial ROI for the client. Here's a breakdown of the results:

• Tax Savings: The client achieved $30,000 in tax savings. This resulted from a combination of avoiding capital gains taxes on the appreciated stock donation and maximizing the charitable deduction on their income tax return. The $40,000 stock donation avoided capital gains tax on the $30,000 gain, which, at a 20% capital gains rate, would have been $6,000. The remaining $24,000 in tax savings came from the deduction of the charitable contributions, which lowered their taxable income and resulting tax liability.
• Increased Charitable Giving: The client was able to increase their annual charitable giving from $15,000 to $60,000 without significantly impacting their overall financial well-being. This allowed them to make a greater impact on the causes they care about and fulfill their philanthropic goals.
• Improved Tax Efficiency: The plan optimized the tax benefits of charitable giving by leveraging appreciated stock and a donor-advised fund. This resulted in a more efficient and sustainable approach to philanthropy, allowing the client to continue supporting their favorite charities for years to come.
• Long-Term Planning: The establishment of a donor-advised fund provided the client with a long-term vehicle for charitable giving, allowing them to plan for future donations and involve their family in their philanthropic endeavors. The DAF also offered the flexibility to adjust their giving strategy over time as their financial situation and philanthropic priorities evolve.

Before and After Metrics:

Key Takeaways

1. Strategic asset allocation is key: Donating appreciated assets, such as stock, can be significantly more tax-efficient than donating cash. Advisors should proactively identify opportunities to utilize appreciated assets in charitable giving strategies.
2. Donor-advised funds offer flexibility and control: DAFs can provide a valuable tool for clients who want to plan for future charitable giving and maintain control over their philanthropic impact. Advisors should consider recommending DAFs to clients who are looking for a more strategic and flexible approach to charitable giving.
3. Tax planning software is essential: Accurate tax modeling is critical for optimizing charitable giving strategies and maximizing the tax benefits. Advisors should invest in robust tax planning software to analyze various scenarios and determine the optimal approach for each client.
4. Proactive communication is crucial: Regularly communicate with clients about their charitable giving goals and opportunities. By proactively engaging with clients, advisors can help them identify and implement effective charitable giving strategies that align with their values and financial objectives.
5. Consider AGI limitations carefully. Always calculate the impact of AGI limitations on charitable deductions to prevent miscalculations and ensure optimal tax benefits.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors identify tax optimization opportunities, uncover hidden risks in client portfolios, and create personalized financial plans at scale. Visit our tools to see how we can help your practice.