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Making Charitable Donations? Maximize the Tax Benefits!

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As the year comes to a close, many are looking for ways to increase deductions to save on taxes. Gifting by check and credit card are the easiest ways to donate to a charity, but they may not be the most efficient from a tax perspective.  Let’s look at an alternative method that may maximize the tax value one receives from a charitable donation.

If appreciated stock is owned in a taxable account, the tax benefits of gifting the stock are two-fold.  In addition to the deduction for the value of the stock on the date of the gift, the embedded capital gain tax is erased.  There is no need to worry about transferring the gain to the charity either, as they won’t pay tax when they sell the stock.  But what if you like the stock and feel it has long-term value in your portfolio? Consider the following option illustrated in this example:

John bought shares of Google not long after it became public at $100/share, and now it’s worth $1,000 per share.  He normally gifts $5,000 each year to his favorite charity in the form of a check.  This year, instead of gifting by check, he gifts 5 shares of Google to his charity.  However, he still likes Google and wants to own shares of the company.  He purchases 5 shares in his account with the money that he was previously going to give to the charity.  As a result, John has now gifted $5,000 worth of stock and his account still holds Google shares.

By using this strategy, John makes his regular charitable donation, gets his deduction, and still owns his stock, but with a more favorable tax status.  If John is in the 25% tax bracket, he will save $1,250 on his federal taxes, plus additional savings on state taxes.  Additionally, he will erase $750 of federal long-term capital gains taxes.

The drawbacks to gifting appreciated stock include potential trading commissions and the additional administrative effort.  In addition, it’s worth noting that this strategy is most effective for long-term stock positions only, since short-term stock positions don’t receive a full fair-market-value deduction.

If a charity has a brokerage account, taking a little extra time to gift stock instead of cash can result in additional tax savings, creating a win-win for both the giver and the charity.  There can be other complexities, so make sure to consult with a tax advisor or a Certified Financial Planner™ practitioner.

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