Out of the Box Giving by Bob Ross

Published on Feb 27th, 2015 by admin | 0

OUT OF THE BOX GIVING

As we go through our Christian life, there are times when we are presented with major giving opportunities. By “major giving opportunities” I mean building projects or other projects that require significant funding. For most of us, as we consider these types of giving opportunities, we tend to focus on money in savings as well as cash flow. Therefore, we may be able to make a one-time gift or commit to a monthly gift for a number of years in order to help the organization attain its goal. However, an overwhelming percentage of our assets are held outside of savings accounts, and for many of us cash flow is limited. I am concerned that we easily overlook several other sources for giving that may be at our disposal and thus dramatically limit the funds that go to Kingdom work. The purpose of this article is to present four sources for giving that may be considered “out of the box” but that could serve to free up dramatic amounts of wealth for work in God’s kingdom.

IRA ACCOUNT

The first source of giving I would like to present is IRA accounts. An IRA (Individual Retirement Account) is an account that is generally funded with tax-deductible contributions or a rollover from a previous retirement account. The funds in the account grow tax-deferred. Once you are 591⁄2, the funds can be accessed without any type of premature distribution penalty; however, all distributions are taxable. These rules apply not only traditional IRAs, but also to SIMPLE IRAs (although SIMPLE IRAs have more draconian penalties for pre-591⁄2 distributions in the first two years) and SEP (Simplified Employee Pension) IRAs.

The out-of-the-box thought regarding IRA accounts comes into play if you are under age 591⁄2. Most consumers never think of an IRA as a source of funds for giving, due to the fact that withdrawals are taxable plus a 10% penalty. Here’s the out-of-the- box thought. If you take a withdrawal from your IRA account pre-591⁄2 to fund a charitable gift, the tax deductibility of the charitable gift (if you are eligible) cancels out the tax consequences of the withdrawal. What you are left with is a 10% penalty for withdrawing prior to age 591⁄2. In other words, if you have a substantial amount of investment built up in an IRA, it can be accessed for work in God’s kingdom for a cost of 10%!

If you are over age 591⁄2, you are in an even better position in that there is no 10% penalty, so any tax on withdrawals from the IRA would be cancelled out by the deductibility. Due to variations in how tax laws apply to your specific situation, it goes without saying that you should consult a tax advisor prior to making a final decision on using this approach for gifting.

401(k)/403(b)

If you are an active participant in a 401(k) or 403(b) plan, you are most likely ineligible to make a withdrawal for gifting purposes. That said, most 401(k)s and 403(b)s do have loan provisions. Under a loan provision, you are eligible to borrow funds from your retirement plan. The terms of your plan may vary, however you would most likely need to repay the loan over a period of five years. The beauty of this approach is that the loan from the 401(k) is not considered taxable income, yet you receive a tax deduction in the year in which you make the contribution. The downside is that you use after-tax dollars to repay the loan over time. You do need to understand that if you were to terminate employment while you still owed on the loan against your 401(k), your plan would most likely require the loan to be repaid or would tax you on the remaining value of the loan. This is obviously an important consideration in utilizing this technique.

Now I understand that those of you who are debt averse are aghast at this thought! In my opinion, one of the great things about a 401(k) loan is the fact that you are paying yourself back with interest, as opposed to paying interest to a bank or some other financial institution in order to utilize the money. As I am writing this, the stock market is near its all-time high. While I would never try to forecast where the market is going, I don’t think it’s ever a bad idea to remove money from the market when it is at or near a high.

DONATION OF APPRECIATED PROPERTY

The previous two methods deal with financial instruments that generate what is known as “ordinary income tax.” There is another section of the tax code that deals with what is known as “capital gains.” A capital gain is the appreciation on property you have owned over time. This could be a stock, a mutual fund, or a piece of real estate. Whatever the type of property involved, when you sell it, if it has appreciated in value, you owe a tax on the capital gain. The good news is that under current tax law, capital gains tax rates are lower than ordinary income tax rates. That said, it is still a tax that would have to be paid in order to sell the property. For that reason, many people continue to hold property they would otherwise dispose of.

The out-of-the-box idea is to donate the appreciated property. In this instance, you would not sell the property, you would donate it. So if the property happens to be a stock, you would donate the stock to the organization, and then the organization would sell the stock. This method allows you to avoid paying any tax on the transaction, and better yet, it allows you to obtain a deduction for the full market value of the stock on the day of the donation. For example, imagine you own a stock that was purchased for $10,000 and has appreciated over time to a value of $28,000. Assuming a 15% capital gains tax rate, if you were to sell that stock, you would owe $2,700 in tax. On the other hand, if you donate the stock at a value of $28,000 and you are in the 25% ordinary income tax bracket, you receive a potential deduction value of $7,000. That’s a $9,700 swing on a $28,000 piece of property. Again, I urge you to consult with a tax advisor prior to finalizing any decision in this area. However, this can be a very powerful way to donate generously to an organization.

One final point on this approach. It has been my experience that oftentimes determining a capital gain on a sale of property can be a somewhat murky process. For example, if the records aren’t well kept, the exact capital gain amount may oftentimes be difficult to determine. By donating the property, you completely eliminate that problem.

GIFTED/INHERITED PROPERTY

This leads to the final out-of-the-box approach I encourage you to consider in your giving. Many people have either inherited or have been gifted property from relatives. You need to understand that there is an important distinction in the tax code when it comes to gifted property versus inherited property.

Let’s look at inherited property first. If you inherit property (from someone who has passed away), you acquire that property on what is known as a stepped-up basis. That simply means that your taxable basis in the property is based on the value of the property on the date of the decedent’s death. In other words, let’s say your Aunt Mary bought a stock in 1942 and paid $3 a share for it. You inherited it last year at a value of $87 per share. You then turn around and sell it for $92 a share. Your taxable gain is $5 a share, not $89 a share. The stepped-up basis is a nice feature in our tax code. The largest financial benefit to donating inherited property is the tax deduction you receive on the value of the contribution. A minor benefit is the fact that you are saved the hassle of figuring out date-of-death value.

The more complicated type of asset to work with is an asset that you have been gifted. This means that you acquired the asset as a gift while the giver was still alive. This type of asset transfer does not receive stepped-up basis treatment under the tax code. When you are given a gift, you are also given the original basis in the asset.

This has two significant implications. First of all, if you want to liquidate the asset, the taxable gain can be much more significant than it would be if you had inherited it. The other significant implication has to do with calculating the taxable gain. It has been my experience that when it comes to gifted assets, this is the hardest area in which to help a client determine the potential capital gain. In other words, if you were gifted that stock by Aunt Mary as opposed to inheriting it, and you sell it for $92 a share, the first thing you need to do is to be certain of Aunt Mary’s basis in the stock. This oftentimes can require some guesswork and leads many tax advisors to recommend the safe approach and claim the entire sale as a capital gain. The benefits of gifting this type of asset are obvious. The gift alleviates you of what could be a sizable tax event, and it alleviates you of the responsibility of determining the capital gain.

My hope is that this article has helped you to “think out of the box” a little when it comes to your giving options. There is more than enough wealth in the hands of God’s people to accomplish God’s purposes. Sometimes we just have to get a little creative in how we access it.

For questions and further information, contact Bob Ross, CFP®, President, Integrity Financial Services, Inc. He can be reached at rross@integrityfinancial.us.com.

Integrity Financial Services, Inc. Freedom Square Bldg. 1, 4401 Rockside Road., Suite #406, Independence, Ohio 44131. 216-502-4181. Securities and investment advisory services offered through NEXT Financial Group, Inc., Member FINRA and SIPC. IntegrityFinancialisnotanaffiliateofNEXTFinancialGroup,Inc.
Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.

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