Do not give cash; donate assets

This morning, I must have dug up a long-sleeved shirt, which signals that fall is coming. I’ve always enjoyed fall, not only because of the much-needed respite from the hot temperatures, but also for the many wonderful events it brings – fall colors, kid-friendly treats, and Thanksgiving family gatherings.

But fall also brings the culmination of the year’s efforts in the form of harvests and weaning time. It’s so nice to see the hard work and the challenges come true.

As you begin to anticipate the financial rewards to come, I challenge you to stop for a moment to assess whether you are maximizing the use of these funds. Is there a way to take our money further? Could you donate some of that grain or calves before they are sold in a way that helps you and local charities?

Problem with cash donations

Consider the following example for a cash donation:

Suppose you are about to sell something like grain or calves for $ 10,000. If you sell these assets at the end of the year you have to pay taxes on the sale. If you are in the 12% federal tax bracket, you write a check for $ 1,200. If you’re in the 22% range, it’s $ 2,200. In my home state of Missouri, the state income tax rate is 5.4%, which is $ 540 more.

If your farm is profitable, you have to pay 15.3% self-employment tax for Social Security and Medicare. (It doesn’t cost exactly 15.3% because you can deduct a portion, but for simplicity, let’s use that number.) So for the 12% taxpayer, that’s a total bill of $ 3,270. Add an additional $ 1,000 if you are in the 22% bracket.

Many people want to give back to charities such as their local church. If a person takes the $ 10,000 in cash received from the sale and donates it to their favorite charity, and you have enough other deductions to itemize a total greater than the standard deduction, the donation can save you money. money at tax time. If you have enough deductions, you can save federal and state taxes, but you still have to pay self-employment tax.

However, in 2017, the Law on Tax Cuts and Employment doubled the standard deduction. As a result, many taxpayers no longer have the benefit of itemizing just because the standard deduction everyone receives is much higher.

In 2021, the standard deduction for a married couple filing jointly is $ 25,100, so unless your itemized deductions are greater than that, you will not receive any financial benefit from the donation as a tax savings. The taxpayer still pays $ 3,270 (or $ 4,270 in the 22% tax bracket) in taxes at the end of the year, even after the $ 10,000 donation.

Consider asset contributions

But what if rather than donating the $ 10,000 in cash, you donated the asset to a local charity before it was sold?

You could deliver the grain to the elevator with a warehouse or warehouse receipt issued in the charity’s name. Then send a letter to the charity stating that the grain is owned by the charity and they can sell it as they see fit. The farmer must cede dominance and control to the charity, and the commodity cannot have any prior sales or price contracts.

Now, since the farmer is not selling anything, no income tax is due. The charity is non-profit, so it also owes no tax. The farmer just saved $ 3,270 in taxes. The $ 10,000 donation only cost you $ 6,730 because you didn’t have to pay the $ 3,270 in taxes at the end of the year.

Essentially, the charity gets $ 10,000, but only $ 6,730 comes from you – the remaining $ 3,270 comes from Uncle Sam (and your State Department of Revenue).

You should work closely with your income tax professional, as there are specific steps required by the IRS to secure the intended tax benefits. Ownership of the asset must be transferred prior to the sale. The charity has to decide when to sell it, not you.

You can’t just deliver grain to the elevator or calves to the sales barn and say write the check to the charity. However, with some planning and the necessary paperwork up front, your donation can generate huge income tax savings and allow you to give even more to your local charity.

Tucker is a business specialist and succession planner at the University of Missouri Extension. He can be contacted at [email protected] or 417-326-4916.

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