Many of our clients give to charity and they do so in a variety of ways. They give cash contributions, their time and energy (e.g. at the local library), their professional services (e.g. on a board of directors), their old vehicles (OPB loves to receive them), their physical labor (e.g. hiking trail maintenance), clothing they no longer wish to wear (Goodwill, among others), and in many other ways. The tax benefits of giving to charity vary, depending on the nature of both the gift and the charity itself.
Some of our clients choose to give to charity by donating their investments. It is possible to give away a portion of your investments to a charity and receive an income tax benefit. You can do it directly by giving stocks, bonds, exchange-traded funds and mutual funds.
Why do this instead of giving cash? Well, if you sell securities that have appreciated in value, you may (depending on your situation) be taxed on the gain (sales price – purchase price) and those taxes could be 30% or more of the gain. But if you give away the security itself, there is no tax. So, you can give away more and receive a larger tax deduction by giving away appreciated securities instead of cash.
Here’s an example. Mary invested $10,000 in a mutual fund 10 years ago that is now worth $20,000. She is in a 15% tax bracket for federal (long term capital gains) taxes and 9% for Oregon state income taxes. Mary wants to give to her favorite local charity. If Mary were to sell the mutual fund, she would pay $2,400 in federal and state taxes (24% of $10,000). The charity would thus receive $17,600 ($20,000 – $2,400). Mary would receive an income tax deduction of $17,600.
If instead Mary donated the mutual fund directly, her charity would receive $20,000 and Mary would receive an income tax deduction of $20,000. We are ignoring some tax nuances that you should consider with your tax advisor should you decide to explore gifting strategies.
In a future post, we will discuss the use of “donor-advised funds” and how they can be an even more effective way to give to charity than a direct gift of a security.