[Note – this was written with the Long Island Coalition for the Homeless in mind. The general principles of getting tax breaks for donating to charities – and doubling them by donating appreciated assets — applies just the same to any 501c3 charitable organizations.]
What is the Long Island Coalition for the Homeless (LICH)?
[The following is directly from their website at http://www.addressthehomeless.org ]:
Originally founded as the Nassau-Suffolk Partnership for the Homeless in 1985, the purpose of the coalition has expanded to include the coordination of homeless services provided by more than 125 agencies through the development of the Continuum of Care groups in Nassau and Suffolk Counties. Since 1995, LICH has also coordinated applications to the U.S. Department of Housing and Urban Development (HUD) for homeless funding. LICH’s successful coordination of the Continuum of Care applications have resulted in over $10 million in funding each year. LICH has also provided technical assistance to organizations in Nassau and Suffolk Counties whose services do not meet the criteria for HUD funding, but are essential for meeting the needs of the homeless.
The Tax Break
And the best part (from a financial planning point of view) is that LICH is a 501(c) tax-exempt charity — meaning that gifts to LICH may be fully tax deductible for most folks who make contributions.
That means that if you are in, say, the 33% tax bracket, if you donate $1000, it’ll only “cost” you $670 because your taxes will be $330 lower.
But wait – there’s more! You also get to deduct it on your state income taxes (and, depending on what state you live in, potentially saving substantially on state income taxes, too). For example, if you’re in the 6.65% bracket in New York, that $1000 will only “cost” you around a bit over $600 once you factor in both the NY and the federal deductions. (Note that we are ignoring the potential deductibility of state income taxes on your federal taxes, which makes it even more complex).
But the bottom line is that giving to terrific charities like LICH is great for the those folks for whom the charity provides such essential services — and for your bottom (tax) line!
“Doubling” the Tax Break!
But wait! There’s more!
We assumed you donated cash (i.e., you donated by check or credit card). What if there were a way to get even more tax benefit? Potentially nearly doubling your gift’s tax break? Really? There is.
If you happen to own any highly appreciated asset — for example, if you bought some stock a while ago before the stock’s price rose, so the stock is worth a lot more now than you paid for it — you may be able to get another layer of tax breaks by donating the appreciated stock directly rather than selling it off and donating cash.
How does this work? Suppose, again just for the sake of example, we use that same $1000 donation, but rather than writing a check for $1000, you were to sell off some stock to generate the cash for your donation.
If you have stock that’s increased substantially in value, you already know that if you sell it, you don’t get to keep all the proceeds. You will owe capital gains taxes on the amount by which it’s appreciated since you bought it.
In this example, if you have $1000 worth of stock that you originally paid $200 for, you’d have $800 in taxable capital gains if you were to sell the stock. Between Federal and state income taxes, you may owe as much as 30% or more in capital gains taxes (again, depending on many tax factors), so when you sell off that $1000 worth of stock, you may owe $240 or more in taxes (30% combined taxes applied to $800 in gains).
But if instead of selling off the stock, you simply donated it directly to a charity — not only could you get the full deduction on the $1000 donation (potentially saving you around $400 as noted in the earlier example), but you may also avoid the capital gains taxes (potentially saving you another $240 as noted just above). So these programs get their full $1000 — but you save over $600 in taxes!
The problem is that not every charity is prepared to receive appreciated stock, and the mechanics of transferring it over may be complex. It certainly wouldn’t be worth all that hassle for most small gifts.
But there’s a solution to this problem, too, and one which offers additional tax planning and timing benefits, simplified record keeping, the ability to make anonymous gifts to charities, and more – in addition to facilitating donations of appreciated assets.
It’s called a “donor-advised fund” and there are literally thousands of them in the country. Each donor-advised fund (“DAF”) is, in and of itself, considered a charity. However, the primary goal for these DAFs is specifically to facilitate charitable giving by letting you make the donation to the fund rather than to the charity and then advising the fund that you’d like them to distribute money to the charities of your choice.
It sounds like an additional layer of complexity, but it actually really simplifies things since most DAFs are very well prepared to receive your donation of appreciated assets. They’ll take care of liquidating the asset and getting your cash ready to distribute, but you still get both the tax break for the value of the gift — and you avoid the capital gains taxes, too. And if you’re not prepared to distribute all of that cash immediately, you may direct the DAF to hang on to it on your behalf and invest it (and grow it) and then direct charitable gifts later on whenever you like.
Moreover, several of the largest DAFs are associated with places which may make it even easier for you to donate stock. Fidelity, Vanguard, and Schwab all have associated DAFs and donating appreciated stock from, say, your Fidelity account to the Fidelity Charitable Gift Fund is almost trivial – you point and click on the website and it’s done. They send you a tax form which you may include when you file your taxes to get your tax break, and, again, you not only get the tax break for the value of the gift you make to the fund, but you also avoid any capital gains taxes on the asset you donate, too.
Note that the tax break you get is at the time you make the gift to the fund — not at the time the fund makes the distribution the charity. That means that you can also, for example, optimize your giving by making a charitable donation to your donor-advised fund account in a high-income-tax year, get the most valuable tax break you can, but then actually distribute the proceeds to the charities of your choice over time (including lower-income-tax years).
It also makes it a lot easier to make a single donation of appreciated stock but have the proceeds distributed to any number of charities.
The Details You’ll Need To Direct Your DAF to Distribute Money to the Long Island Coalition for the Homeless
Direct your DAF to send the donation to:
LONG ISLAND COALITION FOR THE HOMELESS, INC.
600 Albany Avenue, Suite 2
Amityville, NY 11701
Tax ID: 11-2770718
If you do just want to donate cash – you can write a check or donate online at http://www.addressthehomeless.org/donate
Whenever and however you make a contribution to a charitable organization, they should send you a receipt indicating the value of the contribution which you should hang on to for tax purposes.
[Please note that this is not specific tax advice, and the rates and savings suggested above are approximations based on a variety of assumptions about one’s income and tax situation. Your personal situation will vary. Please consult with an advisor or tax professional.]