Giving to Charity and Maximizing Tax Deductions

Do you donate to charity? If not, then you should! It is a great way to help out organizations that help people (or sometimes animals and other defenseless creatures) and get a break on your taxes as well. But there is a better way to donate to charity than to just give cash. Here is how it can be done.

Donating Securities to Charity

Many people have investments. Either they are saving up for something big, like retirement or to purchase a home, or they are stashing away surplus money in order to have it grow much faster than inflation. Regardless of the reason, investments grow, and when they are cashed in, they are taxed.

Take for instance this scenario: you invest $10,000 and a dozen years later it is worth $100,000. If you cash it in, you pay taxes on the $90,000 worth of gain. If you are in the 25% tax bracket, that means you pay a capital gains tax of 15%; and you would owe $13,500 on the sale of your securities. You hold that amount back, and you can donate $86,500 to charity; your donation reduces your tax bill by $21,625.

Now consider this scenario: you invest $10,000 and a dozen years later it is worth $100,000. You then donate the securities to charity, where they sell them. When the donation occurs, their cost basis is adjusted up and is now $100,000; the charity can sell the securities and pay no taxes. You get to write $100,000 of your taxes and save $25,000 on your tax bill.

In the first situation the charity receives less, you save less, and the government gets more. In the second situation the charity gets more, you save more, and the government gets less.

Donating to Charity

Before you go donating to charity though, make sure you know about the charity to which you are giving. Search them out on Charity Navigator so you know if they are taking a lot off the top to pay their CEO and other higher ups; or are they passing more money through to those whom they are trying to help. Five minutes of research can help stop charity fraud.

What is your favorite charity to donate to?