Tax filers may donate long-term appreciated assets to charity without paying tax on capital gains. Thus, subject to certain limitations, even filers in the top-400 income tax brackets are better off donating long term appreciated assets to charity instead of: selling those assets, paying for a long term taxable gain, and then also donating cash to charity. While in year-2000, the top 400 filers donated the maximum amount of appreciated assets to still receive the charitable deduction, in tax-years 1997 through 1999, the group paid over $163 million in avoidable capital gains taxes because they did not take full advantage of the tax benefits of charitable contributions^[1]. Namely, even in the top-400 group, the average filer sold appreciated assets for taxable gains while also donating cash to charity.^[2] If instead, the average top-400 filer had…

To reiterate, in 2000, the average Top-400 filer donated the maximum deductible amount in long-term appreciated assets, and thus took full advantage of the tax laws governing the donation of long term appreciated assets.

Why Some Cash Gifts Were Logical
Even the Top-400 tax filers may have made some donations of under $1,000 each. Such relatively small amounts may not have justified the cost or time involved in donating appreciated assets. However, a more tax advantageous option would have been to utilize a donor-advised fund at a community foundation or financial institution by donating long term appreciated assets to the fund, thus avoiding capital gains tax before making smaller donations out of the fund. A similar tax benefit could have been achieved (though with different deduction limitations) by donating long-term appreciated assets to a private foundation.

     Wealth Trends For the Nation’s Wealthiest 400 Tax Filers
     “In the four-year period from 1997 to 2000, average salaries for the 400 wealthiest U.S. tax filers more than doubled to approximately $30 million a year,” says Tim Stone, NewTithing Group’s President and Executive Director. “Average assets for such filers, not even counting the value of their personal homes and possessions, nearly doubled to over half a billion dollars each. Given such extraordinary wealth accumulation, we estimate that in aggregate over four years, the Top-400 U.S. filers could have donated an additional $19 billion -- to improving communities, health, medical research, education, social services, whatever causes they wanted to help, and still be in very solid financial shape, in fact, wealthy beyond most people’s wildest dreams. That said, the Top-400 U.S. filers donated an impressive 7% of all individuals donations made in 2000, the year for which we have the latest available data.”
     Giving Amidst Budget Shortfalls:
     According to an Aspen Institute study cited in The Chronicle of Philanthropy, 40 states in fiscal-year 2003 had a cumulative $34.6 billion shortfall in their general funds, the portion of their funds from which most allocations to non-profits stem. “Charities and social services face severe long-term funding cuts in one of the worst fiscal crises for states in fifty years,” says NewTithing Group’s Founder and Chairman, Claude Rosenberg. “An additional $19 billion could have kept open fifty homeless shelters that have been closed in fifteen mid-western states in the last year alone; help schools and the underprivileged in California, which is struggling to decide what services to cut, including in higher education; improve the quality of life in Massachusetts, where social services could decline after another round of budget cuts. But wealthy tax filers – and certainly the wealthiest 400 -- can come to the nation’s rescue – by donating the maximum they can comfortably afford to those charities that can provide a solid social return on investment.”
     The Need For a Protective Yet Generous Giving Strategy
     “But even people worth hundreds of millions of dollars need to decide for themselves on the maximum they feel comfortable donating each year,” adds Rosenberg. “The question for them and for people of all wealth levels is not, ‘Should I give to charity when my assets fall_’ but, ‘Even under a worst- case scenario, how much (or how much less) can I comfortably afford to donate_’ There has to be some kind of system for even the wealthiest 400 tax filers, so that when their personal assets fall, they can still feel comfortable with the amount they have already donated.”
     If the Top-400 Practices ‘Tax Leveraged Giving’
     “If the Top-400 employ ‘Tax-Leveraged Giving’ to decide how much to donate,” says Rosenberg, “they would have a powerful tool that protects their wherewithal when their assets fall and increases their donations when their assets rise. Let’s say that this year a married couple with $683 million in assets not counting their personal homes (the average asset level for the top 400 filers at the start of year 2000) decides they could comfortably afford to allocate 3% of their $683 million towards their annual donation level. In other words, they are willing to be out-of-pocket about $20.5 million. Let’s also assume they are then willing to add to their donation any anticipated tax benefits – both from the charitable deduction and from avoidance of tax on capital gains, a benefit achieved by donating appreciated assets. If so, they could comfortably donate about $35.5 million this year and due to tax savings, would not exceed their original $20.5 million charitable ‘spending’ limit. Say by the start of next year, their assets fell to around $642 million (as our research estimates that assets of the average top-400 filer actually did fall at the end of year-2000). If so, then allocating the same proportion of assets towards donations protects them. Because reducing their annual spending limit on charity to 3% of $642 million means allocating $19.3 million towards charitable gifts. When tax benefits are added, this new limit reduces their total annual donations to $33 million, $2.5 million less than the previous year’s donations. (see Appendix I of Affordable Donations In Uncertain Times for a wider range of wealth and donation levels using this “Tax-Leveraged Giving” strategy)
     “Naturally, these are only general guidelines for illustrative purposes. We encourage everyone, including the Top-400, to account for a variety of financial factors before making charitable decisions, which is why we’ve also developed a web-based tool, PrudentPal Charitable Giving Planner. Finally, we urge donors to evaluate the performance of non-profit organizations, and have released a list of questions that they can ask non-profit development officers.”

     NewTithing Group has also released PrudentPal (a web-based charitable giving planner), questions to assess non-profit accountability, and an analysis of giving capacity for various wealth levels, “Wealth and Affordable Donations In Uncertain Times,” at: http://www.newtithing.org

1. Since the Top-400 U.S. tax filers comprise a small sampling, the wealth and/or charitable giving levels of a single member of the Top-400 can affect the averages for the group as a whole.

2. The same tax filers are not necessarily among the Top-400 filers each year. According to the IRS Statistics of Bulletin, Spring, 2003 Publication 1136, from tax-year 1992 to tax-year 2000: A. Under 25% of tax filers appeared more than once in the Top-400. B. Under 13% of tax filers appeared more than twice in the Top-400.

3. For Further information about NewTithing Group’s methodology, see the research report, “Affordable Donations In Uncertain Times”
 

^[1] NewTithing Group’s Assumptions: A. No more than one third of the total gains reported by average filers in yr-2000 to the IRS were long-term gains. B. If the donations made in cash were instead made in appreciated assets: 20% of the appreciated assets would be treated as long-term gains. The remaining 80% would be treated as the cost basis of the appreciated assets. C. For most appreciated assets, the maximum federal capital gains tax rate in 2000 was 20% (in 2003 it was 15%). D. The maximum state capital gains rate in 2000 was 8%. E. The higher potential savings for filers affected by the Alternative Minimum Tax (generally 28%) was not counted, which makes the estimate conservative: Those filers could have avoided even more taxes if they had donated appreciated assets to charity instead of cash. These estimates account for the tax deduction limit on contributions to public charities.

^[2] Data on donations in cash and assets, as well as data on net capital gains were based on the IRS Statistics of Income Bulletin’s latest available data (tax-years 1997-2000).