During a routine check-in meeting, your client casually mentions that the client’s employer, a local company, was just acquired. The client and dozens of fellow employee shareholders are now flush with cash. “I’d like to use some of the money to give to charity,” the client tells you. “How can I reduce my tax burden.”
You try not to cringe as you mentally calculate the capital gains taxes your client could have avoided if the client had given some of those shares to a donor-advised fund years ago when the company was growing fast.
All is not lost. You can still help the client establish a donor-advised, field-of-interest, unrestricted, or other type of fund at The Foundation for Delaware County to fulfill the client’s charitable intentions. The client’s gifts to the fund qualify for a charitable tax deduction in the current tax year, helping to offset the income from the sale of the shares.
Still, this situation is all too common and a good reason to regularly remind clients about their options for making gifts to charity and the tax benefits of each.
Giving cash to a public charity, which your client in this situation will be doing (!), is always a viable option. The general rule is that your client can deduct cash gifts to up to 60% of their adjusted gross income (AGI) in any given year. While this may not wholly offset significant gains from the stock sale, it will help reduce the client’s taxable income.
Giving appreciated stock, which is what you wish your client had done, is a very tax-effective method of supporting public charities. Clients who donate stock outright avoid all capital gains tax levied on a sale of the stock if it were sold before making the donation. Even with the 30 percent of AGI limitation imposed on gifts of highly-appreciated, long-term capital gains property to a public charity; your client likely will still come out ahead because the client’s AGI is presumably a lot lower than it will be in the year of a future stock sale.