Well, I'm a little hesitant to write this post, because it deals with the intersection of two topics that some folks find rather sensitive: money and religion. I can anticipate that some readers might question both my motive for writing this and the propriety of what I did. Let me just say at the outset (1) that my motive is simply to explain the logic behind this approach, and (2) that I would respect (but disagree with) anyone who finds it objectionable for any reason.
I'm a Mormon, and my church encourages the practice of tithing. Members are encouraged to donate ten percent of their income to the church. Today, most contributions are in the form of cash or check, but in earlier, more agrarian times it was common to pay tithing "in kind" by actually delivering grain, livestock or produce. The church still has a "Donations-In-Kind" office, but now the most common donation is not apples or cattle, but rather appreciated stock. Let me walk you through a hypothetical scenario to illustrate the tax consequences of such a donation:
Imagine, for the sake of simplicity, that in Year 1 you have an annual income of $100,000, and therefore pay tithing of $10,000. The U.S. tax code allows you to deduct charitable donations from your income, so you'd only pay tax on $90,000. Assuming, again for the sake of simplicity, that your tax bracket is 20%, you'd pay $18,000 in taxes, leaving $72,000 in post-tax, post-tithing income. Of course, I'm ignoring any other deductions or credits.
Now, assume that you decide to use $1,000 of that post-tax, post-tithing income to purchase 1,000 shares of Acme Corp. stock, which is trading at $1 per share. You don't have any inside information (which would pose problems beyond the scope of this post!), but you just have a sense that demand for anvils and jetpacks will go up.
By the end of Year 2, your investment has performed smashingly--Acme Corp. is now trading for $11 per share, making your holding worth $11,000. But you're ready to unload the stock, since you think it has reached its peak. You also need to pay tithing on your annual salary (again $100,000) and on the increase in value of the Acme stock ($10,000--remember, the initial $1,000 investment was post-tithing). So you owe $11,000 in tithing, exactly the value of the Acme stock. You have two options:
1. You can sell the Acme stock for $11,000, and donate the proceeds as tithing. From a tax perspective, you would have total income of $110,000 (salary plus capital gain), and would be able to deduct the charitable donation of $11,000, leaving you with a taxable income of $99,000. At a 20% rate, you'd pay $19,800 in taxes.
2. You can donate the Acme stock directly to the church and designate it as tithing. Under the tax code, you do not recognize the income on the appreciated stock, so your income for tax purposes is only $100,000. But you can still deduct the full value of the stock ($11,000) from your income as a charitable donation, so your taxable income is now only $89,000. You'd pay taxes of $17,800, a tax savings to you of $2,000.
From my perspective Option 2 is the clear winner here, but I want to try to address some of the objections I think people might have.
Aren't you short-changing the church by giving them stock when you think the price will go down? No, because the market value at the time of donation is the true value to the church. I'm quite certain that the church immediately sells the stock (paying no tax on the sale), and then puts the cash into a more stable investment. So, in the example, the church ends up with $11,000 in cash regardless of whether you choose Option 1 or Option 2. But even if the church were to keep the stock, that would be part of its overall investment strategy, and would be entirely out of your hands. You've paid a full tithe by transferring $11,000 in value to the church.
Isn't it dishonest to evade taxes by donating stock instead of cash? No, the law distinguishes between tax avoidance and tax evasion. The Supreme Court has repeatedly stated that taxpayers are free to order their affairs in such a way as to reduce their taxes, so long as they stay within the law. For anybody who cares, the landmark case is Gregory v Helvering. If there are two ways of accomplishing the same thing, there is no barrier to choosing the way that involves the lowest taxes.
Aren't you somehow tainting your religious practice by finagling a personal tax savings out of it? I don't think so, and certainly not any more so than by deducting my cash contributions, which I think is pretty uncontroversial. The tax code allows deduction of charitable donations for a reason: to encourage private generosity. Although I like to think I would pay tithing whether or not a deduction was available, I am engaging in exactly the behavior the policy is designed to encourage, and so I feel no hesitation to avail myself of it.
If you think this seems fishy, I'd honestly be interested to hear your objections. I have given this a lot of thought, and I'd like to know what other people think. My own experience was much more modest than the example above, and I was very fortunate that my small investment went up rather than down. A quick note: most people who own stock do so in an IRA, a 401k or some other tax-advantaged vehicle, which would make this approach moot.