Making the Most of Your Charitable Gifts
Clients often ask: How do I make the best use of my gifts to charity?
Although the simplest and most common way to give to charity is to write a check, there are more tax efficient ways to give. For larger gifts (say $500 or more), consider using appreciated stock to make your gift. The stock cannot be owned in an IRA or other retirement plan. Using stock that you purchased more than one year before the charitable gift is made provides a significant tax benefit.
Let’s look at an example.
A charitable donation of $1,000 cash is helpful. If you are in a combined federal and state marginal tax bracket of 33%, your cash gift provides a deduction of $1,000 for a tax savings of $333. In effect, the gift only “costs” you $667 ($1,000 given less the tax savings you realize).
Consider a better alternative. You donate to charity shares of XYZ Company currently worth $1,000 that you bought five years ago for $250. Same as with the cash gift, you deduct $1,000 on your tax return, saving you $333 in taxes. But the gift only cost you the $250 that you spent to purchase the shares. Your tax savings from the gift exceed your original cost, so one might argue you made money on the gift!
Note that the same benefit does not exist if you first sell the shares, and then donate the proceeds to charity. In that case, you will incur tax on the gain (the difference between market value and your cost basis). By instead donating the actual shares, you completely and permanently avoid paying tax on the gain!
It’s typically a simple matter to contact your financial advisor for instructions to accomplish this kind of gift. A little extra effort may be worth a lot!
For questions about these topics or other matters, please contact Jean McDevitt, tax principal and private client services lead, at 1.800.244.7444.