Charitable donations, aside from being generous and impactful, are helpful with tax savings.
Charitable contributions can reduce your estate, capital gains, and ordinary income taxes, and can account for up to 30% of your income adjusted gross income (AGI) each year. Since they reduce your adjusted gross income, this can also help directly lower your tax bracket.
There is an extra trick to maximize your tax savings
… and that is, when it comes to charitable giving, cash is not king. Instead, you want to contribute an appreciated asset you own. Here is why.
With contributing an appreciated asset, you get the double win of both not needing to realize (and pay tax) on the gain of your asset you transfer, plus you get to write off the entire current market value of the asset.
For examples, Let’s say you have $100,000 in adjusted gross income, and contribute $20,000 in cash to charity that same year. This brings down your income to $80,000, lowering your overall tax liability for the year. Great.
Now let’s run the same example with contributing an appreciated asset, instead of cash. As an example, you may hold a vanguard index fund that is now worth $20,000, with an unrealized gain of $10,000 (meaning you originally invested $10,000 and it doubled in value). At some point, if you sell that index fund you will have a tax liability on the realized portion of the gain.
If you donate this index fund to charity instead of cash, then this happens:
- You get to write off the entire current market value of the asset, in this case, $20,000 from your current year income
- You do not need to realize the gain on this asset, ever. In this case, you would not be taxed on the unrealized gain of $10,000. At a tax rate of 24% (for ex.), this alone saves/ gains you $2,400 in comparison to contributing cash to charity.
There is also no wash sale rule with charitable donations. So, in the case that you contribute something like a stock, index fund or crypto, you can simply buy back the position the same day if you’d like. By following this simple approach, you can keep your position in the asset while gaining a lofty tax advantage.
Assets you can contribute to charities are wide ranging, including stock, real estate, crypto, land, annuity policies, etc, even private equity in a company.
Many larger charities have brokerage accounts, or other means of accepting certain types of assets, besides cash, as contributions. However, for many of us there is a better way to manage charitable donations
We’ve always recommended setting up a Donor-Advised Fund for your charitable giving purposes.
Donor-advised-funds allow you to “bunch” charitable donations together in any single year to maximize your charitable deductions in years that you have higher income, while you can wait to decide when and where you want to donate the money in the years ahead. And while you wait to further allocate the funds, they grow tax free in a variety of investments.
We’ve had on both Daffy (ILAB 263) and CharityVest (ILAB 202) if you want to check out those episodes and platforms. Even Vanguard has a Donor-Advised-Fund, but oddly we found their management fees to be relatively high at .6% of AUM.
Here are some useful resources to help you in your tax advantaged Charitable journey.
Pro Tip: it is not recommended to donate assets that have lost value as it’s basically the opposite effect of the above. Instead of being the best of both worlds, it’s the worst. Having a loss (depreciated asset) can save you money on your taxes. So, you’d want to realize that loss before you’d contribute the asset to charity.