Charitable Giving: The Financial Benefits

There are many benefits to donating to a worthy cause and the financial benefits associated with the gift can be quite favorable. Potential benefits include: income tax deduction, avoiding or delaying payment of capital gains tax, a possible increase in after-tax cash flow, and a potential increase in the amount passing to your heirs.

There are numerous ways to provide gifts to charities ranging from a simple cash donation to complex estate planning strategies. However, be aware that the deductibility of charitable contributions are subject to limitations depending on the type of charity and item donated.

Many people choose to make cash donations to their favorite charities. Let’s say that Deanna makes a $1,000 cash gift to ABC Charity and might qualify to deduct $1,000 on her income tax return through itemized deductions. Therefore, the cost of the gift to her is only $750 after tax, assuming a 25 percent marginal tax bracket.

Financial professionals suggest that people choose to donate appreciated securities (stocks and mutual funds held more than one year) instead of cash to take advantage of extra tax benefits. For example, assume Deanna gives ABC Charity $1,000 worth of a stock that she inherited years ago when the value of the stock was $100. By giving the stock directly to ABC Charity, she can avoid tax on the $900 gain, and still get a $1000 income tax deduction. The end result: She saves an extra $135 in taxes by donating the stock rather than selling the stock and then giving cash.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages in light of your personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate. Good luck and enjoy both the financial and non-financial benefits of charitable giving.

– Timothy Wyman, CFP, JD

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