The Government Wants You to Pay Tithing! (and they encourage you to pay it with stock)
by Richard P. Halverson
The firstlings of your flock may be stock.
Well, actually the government could care less whether you keep the Lord’s commandments or not. But when you look at the way the tax laws are written you might think, for just a moment, that Congress wants you to pay your tithing with stock or other assets. The laws related to all charitable giving, including your tithing, are quite favorable. First, you are allowed to deduct your contributions from your taxable income. This, of course, reduces the taxes you owe. If you look at it one way the government is paying part of your tithing for you. Next, if you contribute appreciated assets you are not required to pay tax on the profit you have in the property.
As an aside I might mention receiving tax breaks when paying your tithing is more of a privilege than you might guess. There are political forces in the country that oppose it. Not all countries offer deductions for charitable giving and there is no reason the USA needs to either. There are both conservatives and liberals in this country who strongly believe it is bad tax policy. I will not get into their reasons but their ideas bubble to the surface for debate in congress every so often. In addition there are people who feel the deductibility of contributions to churches is a violation of the constitutional requirement for separation of church and state. Don’t take these deductions for granted. Tithing may be a God given commandment but deductibility is a congressional given right.
The focus of this article is on paying your tithing in-kind with appreciated assets. You might think the timing is strange since most Church members have already paid their tithing for this year. But it is not. For one thing now is the time tithing is on everyone’s mind. And soon taxes will be the subject. More importantly, for many people using appreciated assets for tithing can take a full year’s worth of planning.
There are two parts to this article. The first deals with why contributing appreciated assets is such a good idea. The second deals with some do’s and don’ts for Church contributions. If you are already familiar with the idea and sold on it skip to the second part.
CONTRIBUTE APPRECIATED ASSETS
KEEP THE COMMANDMENTS, SAVE TAXES
AND IT’S LEGAL.
There are important tax benefits associated with contributing appreciated property to the Church or any charity. First, the government allows you to deduct the full market value of the asset from your taxes. Second, the government does not require you to pay tax on the profit you had in the asset. For example, assume you owe tithing of $5,000. Assume you have stock that you originally paid $1,000 for that has a market value of $5,000. (Congratulations, excellent investment.) Assume you are in a 28% bracket for capital gains taxes. If you sell the stock to get cash to pay tithing here is what happens.
Selling Stock to Raise Cash For Tithing
Value of Stock-$5,000
Your Cost- 1,000
Capital Gain-$4,000
Taxes at 28%-1,120
Cash Remaining after Taxes for Tithing-$3,880
Additional Cash Needed-1,120
Value the Church Receives-$5,000
In this scenario you will need to dip into your savings for $1,120 to have enough to pay your tithing. Put another way your stock is not really worth $5,000 even though that may be its market value. It is only worth $3,880 after taxes. As an alternative to taking the $1,120 out of your savings you could sell more stock. In this example you will need to sell $6,444 to net $5,000 in cash after taxes.
The better alternative is to give $5,000 worth of stock to the Church.
Giving the Stock For Tithing
Value of Stock-$5,000
Your Cost-1,000
Capital Gain-$4,000
Taxes when Donated at 0%-0
Value Remaining after Taxes for Tithing-$5,000
Additional Cash Needed-0
Value the Church Receives-$5,000
In both cases you are allowed to deduct the full $5,000 contribution from your taxes. In both cases the Church receives $5,000.
PLAN NOW FOR NEXT YEAR (Or why some people don’t do it.)
Over the years I’ve known a number of members who could take advantage of donating appreciated property but did not. I have generally heard three reasons.
First, they say, “I like the stock and don’t want to get rid of it right now.” (I will use stock for all these examples.) In this case the member should donate the stock he/she currently owns. Then take the cash they would have given for tithing and buy the stock back. Their stock portfolio will remain exactly the same, say $5,000 of XYZ stock. However, the tax basis will have risen to the current market value. Then, when the member does feel it is time to sell they will owe fewer taxes at that time.
Second, they say, “I pay my tithing every month. I don’t want to donate a few shares of stock every month.” Paying tithing in regular intervals all year long is a very good idea for most of us. It certainly makes the final contribution at tithing settlement a lot easier. Here is what I recommend. If you have stock you believe you can contribute next year start planning for that right now. Open a new savings account, one that you will not use for everyday transactions. Each month pay your tithing into the account. At the end of the year contribute your appreciated stock to the Church. Then take the money from your special savings account and replace the stock in your investment portfolio.
This approach does require some discipline on the member’s part. There is always a risk that some pressing financial obligation will show up during the year and the member will spend the money in the tithing account. Of course, they will still have the stock to contribute but their decisions will be more complex. May I say, without meaning to offend anyone, in my experience people who do not have the discipline to leave the tithing account alone during the year rarely have appreciated assets to contribute anyway.
There is one other thought related to this. Many people are uncomfortable putting the money in a savings account and then making a single contribution at year-end. They feel like they are not full tithe payers if they do not give the bishop their tithing every month. Tithing faithfulness is determined once a year, at tithing settlement, when we declare to the bishop that we are full tithe payers. If we do that we can then answer in good conscience “Yes” to the tithing question during any worthiness interview for the following year.
Oh, don’t forget to pay tithing on the interest you earn on the special savings account.
Third, many people say, “It is too complicated to contribute stock.” In most cases it is not difficult. If you have stock or mutual funds in an account with a major financial institution call and tell them what you want to do. They can explain the steps. Sometimes you can do it over the phone. Sometimes you will need to send them a signed letter of instructions. If you hold the certificates yourself it is a little more work. Call the transfer agent for the company. (The secretary or treasurer’s office of the corporation can tell you who it is.) Once again explain what you want to do. You may need to send certificates in to be re-denominated into the amounts you need. You will likely have to go to a bank and get a signature guarantee from a bank officer (not a notary). But in the end none of these things are hard to do and they can save you thousands of dollars in taxes.
CONTRIBUTING THE FIRSTLINGS OF YOUR FLOCK
I have been using stock in my example. People familiar with the tax laws know any type of appreciated property can qualify with the IRS. But some of those assets should not be contributed to the Church. It is important to note I do not speak for or represent the Church in anyway. I am expressing my opinions based on experience. I hope readers will find these observations helpful.
If you want to contribute assets to the Church you need to work with your bishop. In doing so you may discover neither he nor his financial clerk have much experience receiving contributions in-kind. They can refer to the Handbook or get additional instructions from the Presiding Bishop’s Office. This is especially true if you want to do anything unusual. Additionally, you need to work with your tax advisor. (Wasn’t I the one that just said it wasn’t difficult?)
There was a day in the history of the Church when most tithing was received in-kind, usually in the form of commodities and goods. Today, the Church is a modern institution with highly sophisticated methods of receiving donations and transferring them to Church headquarters. Our missionaries leave for their fields of labor on airplanes not on horses. Finances are equally modern. The procedures are consistent with the current technology of the world. Unfortunately, live chickens and pails of milk do not move through bank wire transfers very well. So, even though tithing in-kind was once the standard in the Church it is not today. There are some assets the Church will not accept because they simply are in no position to deal with them. With such assets the best thing to do is sell them and contribute the cash.
When you think of contributing assets for tithing remember the principle of contributing the “firstlings of your flock”. Do not contribute assets you have used up worn out and now want to get a big tax deduction for. For example, many charities encourage people to contribute their old beat-up cars. The individual often justifies putting a near Blue Book value on the car for tax purposes when in reality the true market value is far lower. You must assume charities advertising for old cars are setup to handle them. The Church generally isn’t. But even beyond the Church’s ability to handle such assets is the idea of contributing junk for tithing. The same is true for old computers, old lawn mowers, old furniture, you name it. (Incidentally, Deseret Industries may love to get your old junk but that is a whole different deal and it is not tithing.)
You are responsible for establishing the value of your asset for tax purposes. The Church will issue you a receipt that describes the property. For example, 100 shares of XYZ corporation. The receipt will not give a value. You will need to be able to prove to the IRS what XYZ was worth.
Do not use different valuations for the Church and the IRS. Generally, the temptation is to try to put a higher value for tax deduction purposes. Honest with the Lord and dishonest with the government is still dishonest. Even if the IRS doesn’t catch you, you don’t want to pay an honest tithe in a dishonest way
You may have appreciated assets that really are the firstlings of your flock but are still very difficult for the Church to receive. I knew a young man with a comic book collection valued in the tens of thousands of dollars. Unfortunately, the Church has no real skill in receiving or selling comic books. (He eventually, sold them and financed his mission with the proceeds.) Even real estate can be problematical for the Church.
While the Church is equipped to receive most traded securities I discourage you from contributing volatile and unusual securities. For example, I believe it would be unwise to contribute options, futures or commodity contracts. These are so volatile and time sensitive that by the time the Church could receive and liquidate them they might be worthless.
Again I stress I do not speak for the Church. If you have a valuable asset you would like to contribute have your bishop contact the Presiding Bishop’s Office for instructions. Oh, and try to do it before this time next year.
In summary, using appreciated property such as stocks and bonds is an excellent way of paying your tithing. There may be significant tax advantages. It is perfectly legal. To accommodate members seeking to take advantage of the laws that congress has passed the Church has equipped itself to receive certain assets as tithing in-kind. The assets that work best are stocks, bonds and mutual funds that are liquid and freely traded. The first problem is to invest wisely enough to have the appreciated assets. After you’ve done that, giving it away is easy.
2001 Meridian Magazine. All Rights Reserved.
