How to save more taxes if you are charitably inclined?

Written by Vid Ponnapalli, MS, CFP®, EA

Vid Ponnapalli is a Fee-Only financial advisor providing Customized Financial Planning, Investment Management, and Tax Services for Busy Professionals in New Jersey, New York City, and across the country.

December 3, 2015

When it comes to saving money and planning for financial future, there is one certain question on anyone’s mind: How can I save money on Income taxes? What strategies help me reduce my tax bite? There is no better time of the year than now to plan for this. Presented below is one technique that could help you give some relief come tax time.

If you are charitably inclined, donate to charity often, and take a tax deduction for the amount you donated, the good news is that you have an opportunity to increase your savings! Instead of donating cash to charity, if you donate a long-term appreciated stock, you can potentially save capital gains tax on the stock appreciation. This may, indeed, allow you to donate more to the charity (to the extent of your savings on capital gains), and take a tax deduction on this higher amount. Let us see how this works.

For example, let us say you purchased 100 shares of a company in the year 2010 for $10 at a cost of $1,000. The stock has appreciated significantly in recent years (trading at $100 currently), and you are ready to cash out the profits. Let us further say you intend to donate $10,000 this year to a “qualified charity” as defined in IRS Publication 526. You can achieve your intent in two ways:

  1. Sell the stock, donate $10,000 to the charity, and take a tax deduction for the $10,000 donation. However, you will have to pay capital gains tax on the $9,000 profit you made by selling the stock.
  2. Donate the stock to your charity, take a tax deduction for the fair market value of the stock ($10,000). However, in this situation, you will not have to pay any capital gains tax.

Assuming your capital gains rate is 15% this year, you will save $1,350 in option 2. This is because neither the donor nor the charity has to pay capital gains tax on the appreciation of the asset when a capital asset is donated to charity (IRS Publication 526). Moreover, here is the best part: You can now donate your $1,350 savings to charity (thus increasing how much the charity gets), and can potentially take a deduction for this donation! Both you and the charity are the winners!

One caveat to note is that your AGI (Adjusted Gross Income) in the year of donation may limit how much you can deduct in the current year. However, you are allowed to carry over any unused appreciation for the next five tax years (IRS Publication 526).

So, what you think? Your charitable inclination pays! And pays even more if do it the right way. To learn more about the tax efficient opportunities that exist in your unique situation, please Schedule an appointment with me and I will be glad to advise.


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