Are There Strategies To help Me Better Support My Church?
The I Love My Church Initiative Committee has researched the following information aimed at making us all better able to support our church. We are providing very specific information with a very general description of what it means and how it works. Our goal is to provide insight and education on charitable giving strategies.
Some information may help you participate in the I Love My Church Initiative and in your yearly pledge more effectively. Some information may help you plan your life in other ways or allow you to help your extended family. We hope you find it interesting.
A few of the descriptions will be followed by examples to help in understanding. In order to provide some real numbers in the examples, an assumption that the reader itemizes deductions on their tax return and a combined federal and state income tax rate of 23% has been used. Each person’s or family’s specific situation will make a difference in which of the following strategies make most sense.
We will be having two meetings at the church to provide more explanation.
The first meeting is on Monday evening January 25th, at 7:00 pm and the second on Sunday January 31st, immediately after church. There will be a presentation,
a question and answer period, and a chance to share some of your own good ideas.
If you cannot make a meeting and would like more information, go to uumiddleboro.org. Click on Love My Church in the upper left. Members on the LMC Committee Contact List will help you get together with someone to discuss your specific questions and situation.
- Donations of Appreciated Assets: Appreciated assets can be many things but we will talk about stocks. If you bought a stock from McDonald’s, Apple, or Ford for example for $50.00 and it is now worth $100.00, you own an appreciated asset that has an appreciated value of $50.00. If you sell this stock, you will need to pay taxes on the $50.00 profit. The amount of tax you pay will vary based on how long you owned the stock and your yearly income. Most of us would pay the minimum 15% capital gain tax. If you donate this appreciated asset directly to the church instead of cash you will save more in taxes and the church will get a larger gift.
Here is an example: You sell $2,000.00 worth of the above stock. The appreciated value is $1,000.00. You will pay at least $150.00 in federal tax and$52.00 in Mass. tax. You would be be left with $1,798.00 to donate to the church. Assuming the above 23% tax, you will claim a $1,798.00 tax deduction which will reduce your taxes by $413.50. So the net cost to you of the $1,798.00 gift wouldbe $1,586.50.
If instead, you directly donate the $2,000.00 worth of stock (the appreciated asset) to the church, you will claim the full $2,000.00 tax deduction. This will reduce your taxes by $460.00. So the net cost to you of the $2,000.00gift would be $1,540.00.
To summarize: In the first case the church receives $1,798.00 and your cost is $1.586.50. In the second case, the church receives $2,000.00 and your cost is $1,540.00.
- Use of Charitable Giving Accounts: These accounts are offered by large investment firms like Fidelity and Vanguard. They are very easy to set up, and there are no setup fees. After setting it up, there is a maintenance fee usually around 0.6% per year. They allow you to plan what year you will pay taxes on income and, therefore, can save you a lot in taxes. They are particularly helpful if you receive a sizable bonus, need to sell stock, win some money, or have another one-time income event. It will allow you to do charitable giving over multiple years but take all the tax deduction in one year.
Here is an example: You receive a $15,000.00 bonus in 2016 because your boss thinks you are simply awesome. The problem is you lose $3,450.00 to taxes (assuming 23%) or more if it is pushed up into a higher tax bracket. It might even trigger the Alternate Minimum Tax, causing you to lose some of your normal deductions. If instead you deposit this money into your “Charitable Giving Account” you will qualify for a tax deduction on the full $15,000.00 in 2016. This offsets the taxes on your bonus to zero and also removes it from the Alternate Minimum Tax calculation. You then direct the Account Manager to pay your church pledge over multiple years as you wish. There are a number of other advantages and services the Account Manager will provide to you. It is all done for you at the minimal 0.6% charge, and they will prepare and send to you all necessary tax documentation.
- Qualified Charitable Distributions (QCD): This strategy applies to people over 70 1/2 who own a tax deferred retirement account. An IRA, 401K, SEP or 503b annuity are common examples. Upon turning 70 ½, the government requires that money be withdrawn each year. This is called the Required Minimum Distribution (RMD).The amount required is based on life expectancy and the total value in the accounts. Congress has just recently enacted a permanent new Qualified Charitable Distribution. The QCD allows taxpayers to directly gift all or a portion of the required distribution to a charity without it increasing their Adjusted Gross Income. For someone who does not itemize deductions, the QCD gives full tax savings on the gift. Because of this new QCD, older taxpayers who can no longer itemize deductions can still get full tax savings from charitable giving. Because Adjusted Gross Income is kept lower, it avoids the risk of higher costs for Medicare and increases the likelihood that the taxpayer who does itemize, will qualify for medical expense deductions.
- Use of An Equity Line: This option is a surprisingly reasonable method to give a large gift in an affordable way. For instance, assuming the 23% tax, and including all interest, a $10,000.00 gift to the church would cost the giver only $8,404.70. A $5,000.00 gift would cost the giver only $4,202.35. A $3,000.00 gift would cost the giver only $2,521.60. An equity line is a mortgage against your property. They can have many advantages for a financially disciplined person or family. Equity lines have no upfront cost to the borrower since the bank covers those costs. (If they do not, go to a different bank) The only cost is the interest you pay. Additionally, unlike a traditional mortgage, you only pay on the amount you are using and only for the time you use it. Like a traditional mortgage, interest paid is tax deductible. Equity lines are good for short term or long term use because you can use any amount you wish up to the approved maximum. You can pay the principal back and then re-use it as frequently as you wish for usually 10 years. The interest rates are variable and consequently low with current rates at about 2.75%
Here is an example: The above $10,000.00 gift to the church today would be paid back to your equity line over 5 years (60) months). Equity lines are available today at approximately 2.75%. Since the equity line interest rate is variable, we will use 3.5% (to be conservative) as an average rate over the 60 months. The monthly payment will be $181.92. The total paid back to your equity line including interest would be $10,915.20. Since you gifted the $10,000.00 to the church and the equity line interest is deductible, your tax savings would be $2,510.50. Your total cost to gift the church $10,000.00 today, would be $8,404.70 spread over 5 years. Because your $10,000.00 gift was made in 2016, you will receive a $2,300.00 tax refund in 2017. You could use it to buy a riding lawnmower (bad idea) or you could further reduce your cost if you use it to pay back your equity line.
It is important to note that this equity line strategy takes self discipline! The bank will not tell you how much to pay per month or what todo with your tax savings. It is a great tool for this and many other uses but only if used to your best advantage.
The following options are either very simple needing no explanation or very complicated. The complicated options can have good tax advantage so we are mentioning them. If any of the complicated options are of interest, please contact an I Love My Church Initiative Committee member and we will get you the information you need.
- Tax timing: Controlling the year of ones gift can increase tax benefits.
- Charitable Gift Annuity: Enables the donor to receive life income. (a pooled income fund can be constructed to make this available to smaller donors)
- Charitable Remainder Trust: Sets up a trust to govern sharing of the gift between donor and the church. The donor gets paid income during their life with the remaining principal then going to the church.
- Retained Life Interest: Giving a house while retaining the right to live there for the rest of his/her life.
- Life Insurance: A no longer needed policy can be given to the church.
Notes: The 23% assumed combined federal and state income tax rate is low for
many of us. If your combined rate is more than 23% you will gain more advantage than the examples show.
We will likely add to this list in the future. We will keep it available permanently on the uumiddleboro.org website and in the church office. –