We have all seen advertisements like this one. They work because we like to buy things at a discount. We are pleased when a homeowner accepts a purchase offer well below the list price and when an automobile dealer drops the price during negotiations. Stores are more crowded during sale periods. It’s not just paying less that attracts us but also the feeling that we have won a victory.
There is a sense in which a charitable gift is on sale all of the time. Consider these discounts:
First, there is the discount due to the charitable deduction. The federal discount can vary between 10% and 39.6%, depending on one’s tax bracket. Let’s suppose that Bill is subject to a 33% marginal tax bracket. Then the discount on a $1,000 gift is $330, so the net cost of his gift is $670. If Bill lives in a state with a state income tax that allows charitable deductions, the total discount might be in the 38% range.
Second, there may be a discount due to avoidance of tax on capital gain. If Bill were to contribute stock having a fair-market value of $10,000 and a cost of $2,000, the $8,000 of gain would not be taxed. Assuming a 15% tax rate on the gain if he sold the stock, the discount would be $1,200 (15% x $8,000 gain). The combined federal discount for Bill on the stock gift would be $3,300 plus $1,200, which equals $4,500. Thus we might say regarding Bill’s stock gift: “45% off full price!”
A third discount, applicable to gifts made at the end of life — such as bequests — is the federal estate tax. Under new legislation, only a small percentage of people have estates large enough to be subject to the federal estate tax — though they might be subject to a state estate tax. For those with larger estates, the tax rate is 40%. Because a charitable deduction is allowed for an estate gift, the net cost of leaving a bequest of $100,000 would be $60,000 — more if a state estate tax applies. Thus, for some people we could say that a charitable bequest is “40% or more off full price.”
A fourth discount applies when a person makes a contribution and receives life payments in return. Let’s say that Martha, aged 72, contributes $200,000 for a charitable remainder unitrust that will pay her 6.0% of trust assets each year for life, and let’s also assume that she is in the 33% tax bracket. She receives a charitable deduction of $99,392, saving her $32,800 in taxes ($99,392 x 33%) over the next several years when she is using the deduction. She also receives payments for life, and the present value of those payments (based on the current IRS interest rate) is $100,608. The combined value of what she gets back is $32,800 + $100,608 = $133,408, meaning that the net cost to her of a future gift in the $200,000 range is only $66,592 — a significant discount, indeed.
Please call us to learn more about how you can make a charitable gift at a discounted price.