If you wanted to support a charity, you could make a cash donation or use a charitable gift planning option such as a Charitable Gift Annuity or Charitable Remainder Unitrust. However, if these options aren’t right for you, you could donate appreciated assets outright instead.
Usually, appreciated assets (such as stocks that have risen in value since they were purchased) are subject to capital gains tax when they are sold. Capital gains are calculated by subtracting the original purchase price of the assets from their price at the time of sale. The amount of the tax depends on several different factors (such as your income tax bracket and how long you have held the assets); regardless, the tax will ultimately cut into the sale’s profits.
However, if you donate the appreciated assets directly to a charitable organization, you will avoid the capital gains tax. The organization, due to its tax-exempt status, won’t have to pay any taxes when they sell the assets. Additionally, if the appreciated assets have been held long-term (i.e., longer than one year), the assets’ value on the day of the donation can be claimed as a tax deduction by the donor. (The deduction for assets held less than a year is equal to the assets’ purchase price).
On the other hand, if you have assets that are worth less than what you paid for them – known as a capital loss – you could sell the assets instead of donating them. By selling the assets at a loss instead of donating them directly to charity, you will be able to claim the loss on your taxes. Doing so reduces your taxable income which in turn can mean a lower tax bill. You can still donate the proceeds from the sale to a charitable organization and receive a charitable tax deduction as you normally would from giving a cash gift.
Covenant Trust Company believes that investments are vital part to everyone’s financial security; we also believe they can play an important role in reaching charitable goals, too. If you would like to know more about your charitable gift-giving options, you can leave a comment below or contact us.
As always, please contact your tax advisor for information on how these ideas pertain to your situation.