Divorce Taxation – Part IV
Filed under: Divorce | Tags: asset transfers, court orders, divorce, divorce decree
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
July 18, 2012
Asset Transfers
Splitting up assets in a divorce can create some interesting situations where special tax laws apply. For instance, any assets transferred between spouses within one year of a divorce are considered transferred incident to divorce and are tax-free transfers. In such a situation, no gain or loss is recognized, and the adjusted basis transfers from one spouse to another just like a gift, even if the property transfer was not stipulated by the divorce decree.
Some strange outcomes can occur from this law. Theoretically, you could have a situation where spouse A has $20,000 worth of stock certificates that were bought for $5,000 many years ago. Spouse A sell the stock to Spouse B for $20,000 nine months after they are divorced. Spouse A would recognize no capital gain on the sale and pay no tax. Instead, Spouse B would receive a basis of $5,000 (instead of $20,000) and then owe the tax on any gain from a future sale that one would normally think belonged to Spouse A. Ouch – this could bite the ill-informed! These same laws, however, could be used in a positive manner for planning purposes. For instance, if spouse A needed cash, and spouse B had large capital loss carryforwards that were likely to go unused, they could work out an arrangement to their joint benefit.
If property is stipulated to be transferred by a divorce decree, the tax-free transfer laws apply for six years. Beyond six years, the tax-free transfer laws can still be applied if facts and circumstances support the idea that the transfer was carrying out the division of property stipulated by a divorce decree.
Sometimes, it is not always clear what qualifies as property for the asset transfer rules. For instance, transferring the right to receive future income can be a gray area. There are also other exceptions to the rules such as when trusts or nonresident aliens are involved, etc. It is always best to get sound advice before acting!
Court Orders
It is also important to remember that a court order is a controlling document. Generally speaking, whatever is decided in a court order will govern and override any default tax laws that would otherwise control. It is best to seek competent tax and legal advice, so you have a clear idea of what to expect, and have the opportunity to negotiate the tax aspects of your settlement.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Divorce Taxation – Part III
Filed under: Divorce | Tags: abandoned spouse, alimony, capital loss, carryforwards, child support, child tax credits, custodial parent, dependent care credits, divorce, divorce decree, earned income credits, education credits, exemption, Form 8332, general business credits, head of household, health insurance, homebuyer credit, HSA, investment interest, legal separation, medical expenses, minimum tax, MSA, net operating loss, NOL, noncustodial parent, passive activity losses, tax assets, tax benefits
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
July 4, 2012
Since it is July 4th, and we are discussing divorce, I suppose it would be appropriate to say, “Happy Independence Day!”
Tax Carryforwards
When going through a divorce it is important to realize you may have valuable “tax assets” that need to be divided according to tax law or negotiated between spouses. Capital loss carryforwards (such as those generated by stock sales) are supposed to be allocated based on whose assets from the past created the losses. Net operating loss carryforwards (such as those generated by a large business loss) are supposed to be determined by recalculating what the losses would have been if you had been filing separate. Minimum tax, general business credit, and investment interest expense carryforwards can be negotiated.
Suspended passive activity losses (such as those generated by rental properties) go with the individual receiving the property, however, there are some pitfalls to avoid that could require the passive activity losses to be added to basis, rather than becoming immediately available to the spouse receiving the property. If you happen to have bought a house with the $8,000 homebuyer credit that has to be repaid, the person who takes the home becomes solely responsible for repayment.
In practice, I have not seen the IRS come down heavily on how carryforwards are divided, but it is important to know what you are entitled to, so you do not miss out on something that could save you money down the road.
Children
Children present a number of planning issues in a divorce. Tax benefits related to children include the child’s exemption, child tax credits, dependent care credits, exclusion of income related to dependent care benefits, earned income credits, education credits, and head of household filing status. The custodial parent (defined for tax purposes as the parent who lived with the child most during the year) is generally the one eligible for these benefits, although the custodial parent may release two of those (the exemption and child tax credits) to the noncustodial parent by filing Form 8332, and keep the remaining benefits. As discussed in a previous issue in this series, it is also possible for both spouses to claim head of household if the abandoned spouse rules are met. If both parents meet certain qualifying child rules, they can also each claim medical and health insurance expense deductions they pay for the child and can distribute money from HSAs, MSAs, etc. for the child’s benefit. When multiple children are involved, planning can be done to preserve the head of household status for both spouses.
Child support payments are not taxable income to the recipient parent, nor are they deductible by the parent paying the child support. Alimony on the other hand is income to the recipient, and deductible by the paying parent. Be sure your divorce decree is clear and specific on the payment of alimony and child support. Alimony is a tricky area and you must be very careful about how it is paid.
To be continued next issue…
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Divorce Taxation – Part II
Filed under: Divorce | Tags: community property, court order, decree of divorce, divorce, estimated tax, legal separation, marriage, separate maintenance, split deductions, split income, withholdings
Comments (2) Originally published in the Pacific Grove Hometown Bulletin
June 20, 2012
Community Property/Income and Deductions
A complicating factor with divorces is that state law governs a good bit of how taxation will work, and each state has different laws. California is one of nine community property states. It is has similarities to other community property state tax laws, but differences as well. In California, community property laws say that income and deductions derived or expended while married are generally split 50/50 during the community period. The income and deductions generated after the community period ends belong to each taxpayer. The community period for California purposes ends when the taxpayers separate with no intent to get back together. This does not require a final decree of divorce or separate maintenance, but is based on facts and circumstances.
Many divorcing couples often take the approach, “You report your W-2 on your returns and I will report mine on my returns,” but that is technically not correct since in most cases they should each be reporting half of each other’s W-2 during the community period. Spouses are required to provide the necessary information for the other spouse to file a complete and accurate return. This situation can lead to an advantage or an abuse depending on the familiarity of each spouse with the tax laws.
Although the laws do get complex, generally speaking, community property is anything acquired during the community period, or any separate funds brought into the marriage that are tainted by intermingling the funds with community funds. If the taxpayer maintained any separate property during the marriage, then the income and deductions for separate property would go to the spouse who owned the property. An example of this would be: Spouse A brings a rental property and a large bank account to the marriage and maintains it in his or her own name. Spouse A uses the bank account exclusively for the rental property and pays all rental property expenses and deposits all the rental property income into the bank account. Since there is no intermingling with any assets created after the marriage began, the property would maintain its character as separate property and the income and deductions would fall 100% to spouse A in the year of divorce.
Splitting Tax Withholdings and Estimates
Taxes withheld (such as with a W-2) during the community period are generally split 50/50. Estimated tax payments made are credited under the taxpayer whose social security number is submitted with the payment. Individuals going through a divorce should be alert to this as they may not realize the other spouse has made payments in their own name from community property funds. For California, estimated payments with both social security numbers submitted are applied to the tax return of the first taxpayer to file. However, taxpayers are supposed to submit a notarized statement signed by both individuals prior to either filing, specifying how the taxes withheld and joint estimates should be applied. Note, a court order in the divorce proceedings will control and overrule any of these laws, including a retroactive application of joint estimated payments to the spouse the court order specifies.
To be continued next issue…
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Divorce Taxation – Part I
Filed under: Divorce | Tags: abandoned spouse, carryforwards, community property, court order, divorce, estimated payments, filing status, head of household, married filing jointly, married filing separate, single, splitting deductions, splitting income, tax withholdings, taxation
Comments (1) Originally published in the Pacific Grove Hometown Bulletin
June 6, 2012
Once in a while, I work with clients that are going through a divorce. And once in a while in those once in a whiles, I work with clients who are both happily going through the divorce process, and seem to get along better than most married couples I know! Most of the time, however, it seems to be a challenging and confusing time with a lot of mixed feelings on both sides. Another aspect of divorce that can be challenging and confusing is the taxation in the years surrounding the divorce.
One of the most common themes I see with individuals going through divorce is that many tax issues are not even considered in the process. People know it is a good idea to hire an attorney, but they forget to consult a competent tax professional about how it will play out, or what they may want to have their attorney negotiate on their behalf. For many people they think the only tax consideration is who gets to claim the child, if one is involved. In reality, there are several big issues to consider, and the tax law can sting those who are not aware.
In the next few issues I will go over some of the ground rules and areas of interest pertaining to taxation during a divorce including filing status options, community property laws, splitting income and deductions, crediting tax withholdings and estimated payments, allocating carryforwards, effects of children, transferring assets, and court orders. It is also important to note that state law heavily governs divorce taxation. I will be speaking from the perspective of California residents throughout the articles.
Filing Status
A basic question when going through a divorce is “What filing status should I use?” The answer is that it comes down to your status on the last day of the year. Taxpayers are considered unmarried for tax purposes if the final decree of divorce or a decree of separate maintenance is obtained by the end of the year. If either of those two triggering events occurs, they would file Single or Head of Household returns as applicable. Otherwise, they are still considered married and would file joint returns or Married Filing Separate returns.
One interesting exception, however, is that one or both individuals can claim Head of Household status while still married if they meet the Head of Household rules, and the spouses did not live together during the second half of the year. These rules are sometimes referred to as the “abandoned spouse rules.” Many tax preparers are unaware of these rules, but they can be quite advantageous since divorcing individuals often do not want to file jointly, and Head of Household status is typically much better than Married Filing Separate.
To be continued next week…
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Losing Your Home? Favorable Tax Provisions Expire 12/31/12.
Filed under: Foreclosures and Short-Sales | Tags: 1099-C, cancelled debt, Foreclosure, FTB, insolvency, IRS, qualified principal residence indebtedness, recourse, section 108, Short-Sale
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
May 16, 2012
If you think you may not be able or willing to hold on to your home for the long-term, you should seriously consider your options for short sale or foreclosure as soon as possible. At the end of this year, Internal Revenue Code Section 108(a)(1)(E) is set to expire (California tax law conforms to the expiration also). This is the provision that allows people to possibly exclude from income, cancelled debt when recourse loans on their primary residence are higher than the value of the home. These transactions take three to 12 months to complete, so time is of the essence.
Between foreclosures and short sales, short sales are your best option in this regard. This is where you find a buyer and the lender accepts the buyer’s offer, even though it is less than what you owe the lender. Current law in California forces lenders to cancel the remaining debt as of the date of the short sale and prohibits them from pursuing your personal assets if they agree to the short sale. A foreclosure does not guarantee the lender will not pursue you for the remaining debt. Even if they do decide to cancel the debt, it may not be until after the end of this year.
Whether debt is cancelled by short sale or possibly by foreclosure, the cancelled debt is potentially taxable income to you. If you did not take cash out during past refinances, or to the extent you put cash-out back into improving the property, you will likely be able to exclude the cancelled debt income from your taxable income due to code section 108(a)(1)(E)…until the end of this year. After that, you will likely only be able to exclude the debt if, and only to the extent you are insolvent (more liabilities than assets). Bankruptcy is another option, but it must be filed before you lose the property – in other words, plan early.
Imagine $200,000 of income on your tax returns from cancelled debt, generating an extra $75,000 or more of tax. Many people will find these transactions to be the largest potentially taxable transactions in their life, so it is important to seek competent professional advice, plan appropriately, and avoid the tax if at all possible.
Prior articles relating to foreclosures and short sales are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Paying the IRS: Installment Agreements
Filed under: Extensions, Tax Collections | Tags: 3567, 9465, collections, Extension, FTB, installment agreement, IRS, late filing penalty, late payment penalty, owe
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
May 2, 2012
Hopefully by now you have filed your tax returns. If you decided to file for an extension, that is fine, but keep in mind you have not extended your time to pay any tax owed. That was still due on April 17th. Filing the extension was key, however, because a late filing penalty is assessed at five percent of the balance owed for every month the return is late (capped at 25 percent). If you do not owe taxes, you are fine, even if you did not file an extension, since the penalty is based on the balance owed.
If you did file your return and you could not come up with enough cash to pay the IRS, you have payment options. If you feel you can pay the IRS within 120 days, call 1-800-829-1040 and advise them of this fact and they will not harass you for payment and you can avoid the cost of setting up an installment agreement.
If you need to make payments over time by setting up an installment agreement, the IRS will generally allow this quite easily if your balance is below $25,000, you can pay it off in seven years, and you are in good standing with the IRS. This is accomplished by filing Form 9465. There is a $105 fee to set up an installment agreement, unless you elect electronic payment withdrawals from your bank – this cuts the fee down to $52. Interest accrues at a variable rate which changes every quarter (currently three percent per annum) and late payment penalties may also still be assessed (1/2 percent per month, or portion thereof – approximately six percent per annum). Other minor penalties may apply also.
In practice, I have never had an installment agreement under $25,000 turned down or even questioned by offering a monthly payment amount equal to the starting principal balance divided by 60. If you owe over $25,000, you have to provide detailed information about your financial situation through additional forms before an installment agreement is granted. With an installment agreement in place, you avoid harassing letters and other possible collection actions such as levying bank accounts, garnishment of wages, forcing the sale of assets, etc. (Forcing the sale of assets is rare unless you owe at least $100,000…and are obstinate!)
If you have large tax debts that may be difficult or impossible to pay there are other less friendly avenues such as offers in compromise, or even bankruptcy filing if the tax debts are at least three years old.
California has a less generous installment agreement option, but can be requested by filing FTB Form 3567.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Elijah Bennett Long
Originally published in the Pacific Grove Hometown Bulletin
April 18, 2012
At 10:16 am on April 3rd, I entered fatherhood! Needless to say, this has made the most interesting end to a tax season for me so far! Elijah Bennett Long was born at our home weighing in at seven pounds four ounces and 20 inches long. Personally, I think it is quite neat that he will have a Pacific Grove birth certificate – not too many of those around!
I was negotiating with him while he was in the womb for the past few months and explaining why it would not be wise to renege on his contract date of April 21st. He brought up several valid points: 1) he was not the proximate cause of this event 2) there were early escape clauses in his contract, and 3) interested parties (Joy – Momma) would prefer to have him at seven pounds four ounces rather than closer to nine pounds! I admit, the kid had some good points.
Despite his exercising the early exit-strategy rights on the development phase, we have decided to approve his initial contract for child-rearing. We are thinking to have this contract extend through kindergarten with two renewable six-year options. The second renewable option would include an opt-out for us after the middle school years. There would be some additional language which could allow for a third six-year option to get through the college phase depending on certain performance benchmarks achieved in the prior option period.
With business out of the way, we have been having the time of our lives! How fun it is to come home and see that tiny bundle of love. It actually has worked out quite well these past few weeks as tax season has come to a close. I was working late hours anyway which made it perfect to help out with some of the night duties since I was still wide awake! What a blessing!
Next step…convincing Momma that baby-modeling is a good idea so he can generate earned income and open a Roth IRA!
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Don’t Want to Lock up Cash in a Retirement Account? Consider Roth by April 17.
Filed under: Retirement Assets | Tags: contributions, conversions, five year rule, IRA, penalty free, retirement, rollover, Roth-IRA, tax free, Traditional IRA, withdrawal
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
April 3, 2012
A lot of people like the idea of contributing to a retirement plan, but do not like the idea of locking up the money until retirement without being penalized. People are often concerned about supplementing income if they lose their job, or have an unexpected major expense, or even if they are saving for a big purchase such as a car or a home. If you find yourself keeping money in a taxable investment account, savings, or checking account for these purposes, I strongly encourage you to start contributing it to a Roth IRA if you are eligible.
The beauty of a Roth IRA is that you can take out your direct contributions tax-free and penalty-free at any point. For example, if you contribute $5,000 a year for three years, you can always take out up to that $15,000 at any point. What you cannot take out are the earnings. If it grows to $16,000 through interest, dividends, or appreciation, you cannot take out that last $1,000 without penalty and tax until you retire. The big benefit is that your Roth IRA is an umbrella that protects the assets under it from being taxed if they generate income. You will pay no tax on the $1,000 earnings in the Roth IRA – whereas, you would if it was held in a taxable account. You can hold almost any investment in a Roth-IRA including cash, stocks, bonds, mutual funds, or even alternative investments such as rental property. You can currently contribute up to $5,000 a year ($6,000 over age 50) and you have until April 17, 2012 to contribute for tax year 2011. Don’t miss out!
Some advisors incorrectly cite a five-year rule that says you have to have the account open for five years before taking penalty-free withdrawals. This applies in certain circumstances, but not to direct contributions. What they are failing to understand are the ordering rules for distributions. I will say again, you can always take out up to the sum-total of your direct contributions made to the account with no tax and no penalty. Be aware that rollover conversions from other retirement plans and traditional IRAs are not considered direct contributions. You should get competent tax advice if you are going to take out beyond your direct contribution total.
To be eligible to make a Roth IRA contribution, you must have at least as much earned compensation as you want to contribute. If you file jointly, you can contribute for your spouse even if he/she does not work enough (or at all) assuming you earn enough compensation between the two of you. Your ability to contribute starts phasing out as your income hits $107,000 if filing single, and $169,000 for married filing jointly. These amounts are based on special modifications to your adjusted gross income, so you would want to verify with your tax professional if you are close to these thresholds. You can also contribute to a Roth IRA even if you contribute to an employer-provided plan (some exceptions for married filing separate), however, your contributions to traditional IRAs and Roth IRAs are aggregated for contribution limit purposes.
One other advantage of the Roth is that you can continue to contribute during your entire life as long as you have earned compensation, and there are no required minimum distributions when you reach age 70 1/2 as there are for traditional IRAs.
What you might find by contributing, is that something else works out in your financial life whereby you do not end up needing that cash or part of it after all, and at that point, you will be very glad you contributed to the Roth during those years. To set up a Roth IRA, talk to your financial advisor. If you do not have an advisor, you can go online to a financial institution like Vanguard or Fidelity and set one up in 15 minutes.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Short-Sale: Effects of CA Senate Bills 931 and 458
Filed under: Foreclosures and Short-Sales | Tags: 1099-C, 580e, anti-deficiency, cancellation of debt, cancelled debt, deficiency, junior lien holder, recourse, SB 458, SB 931, Short-Sale
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
March 21, 2012
This past summer I wrote a series of six articles on short-sales and foreclosures. I am still receiving calls/e-mails from people all over California that have seen the articles republished on my website. One caller, a bankruptcy attorney from the Sacramento area, thought that an article addressing California Senate Bills (SB) 931, effective January 2011, and SB 458, effective July 2011, would be helpful.
Prior to these bills, there were cases where a lender would agree to a short-sale and the homeowner would give the home back thinking the remaining recourse debt was cancelled. Later, they would find the lender was still pursuing them for the deficiency and that the papers they signed did not actually cancel the remaining debt. SB 931 partly addressed this by not allowing the primary lender to pursue you for the deficiency once they agreed to a short-sale.
The problem then arose that junior lien holders such as a second loan or HELOC would continue to pursue the owner for the deficiency on their loan because the bill did not require them to cancel their remaining debt. Hence the passage of SB 458 which does not allow them to pursue the deficiency either. These bills have now both been codified into law in California Code of Civil Procedure Section 580e.
It is clearly good news that you will not be pursued for the debt, but you will still have a wrestling match with the taxing authorities. The new law requires the lenders to accept the settled amount as payment in full and to fully discharge the remaining amount of indebtedness. Since the lender will be getting a tax deduction for your bad debt, you will be getting a 1099-C and will have taxable income unless you can exclude a portion or all of the debt under the provisions in Internal Revenue Code Section 108 and related Treasury Regulations.
The new law makes junior lien holders less willing to accept a short-sale, since they are often giving up their right of pursuit and get very little out of the deal. Kristin DeMaria, a short-sale attorney with Mallery & DeMaria PC in Monterey said, “Under this new law, the junior lien holders can no longer ask the sellers for money, but they can say no to the short-sale. The sellers, however, can voluntarily offer money and may want to do so to avoid pursuit for the full deficiency after a foreclosure on a recourse second loan.”
For tax purposes, it is highly important that you file a timely tax return with the correct forms, statements and calculations, otherwise you will unknowingly waive your right to any possible discharge of cancelled debt to which you may be entitled. Having an attorney and a CPA that specialize in the respective negotiation and tax issues is key to navigating these waters successfully.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Why You Should Donate Appreciated Assets Instead of Cash
Filed under: General, Tax Strategy | Tags: appreciated assets, cash, charitable contributions, donate, donation, mutual funds, real estate, stock
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
March 7, 2012
Last issue I spoke about the issues surrounding charitable deductions for donated goods or services. I mentioned at the end of the article a much better way of making donations rather than through the contribution of goods, services, or even cash – that way is through the donation of appreciated assets. I will use stock in my explanation below, but keep in mind this same principal generally applies to any appreciated assets including mutual funds, real estate, art work, collectibles, etc.
The donation of appreciated assets, such as stock, is an incredible tool if you 1) have some, or 2) can plan to have some for donations down the road! Donating appreciated stock is like having your cake and eating it too: you basically get two tax benefits. Here is how it works. Let us assume you buy $1,000 of stock, and over time, and after a treacherous dip to $400 (!), it rebounds and climbs to $1,500. Then let us assume your favorite charitable organizations need funds. You could sell that $1,500 of stock and give the cash proceeds to the organization. You would get a $1,500 charitable donation, but you would also have a taxable gain of $500 ($1,500 sales price less $1,000 cost) since you sold the stock.
Instead of selling the stock, let us assume you transferred the stock in-kind to the charitable organization. You still get the $1,500 charitable donation but you do not have to pay any tax on the built-in-gains of $500. This could be a huge benefit, especially if you have stock that has appreciated substantially over many years. You would be much better off making your charitable contributions in this manner, rather than writing checks.
For those with no appreciated stock, long-term planning might suggest opening a separate brokerage account and investing money each year in growth stocks to be used in the future for making donations in lieu of your less favorable cash. This may take a number of years to achieve, but eventually you could turn the tables and find yourself making your larger donations in appreciated stock, saving you even more tax.
Keep in mind, if you plan to donate something other than financial assets that have a readily determinable value, you would typically need an appraisal if the value is over $5,000.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 