Many investors make donations to 501(c)(3) organizations such as religious, educational, or charitable institutions, typically by making a cash donation near the end of the year (writing a check, making an online bill payment, using a credit card, etc). Instead of donating cash, Palisade strongly recommends to its clients that they donate highly-appreciated assets from their investment portfolios, as there are significant tax benefits from doing so.
The main benefit of donating highly appreciated assets instead of cash is that you avoid paying capital gains taxes on the donated asset. When you sell an asset that has increased in value, you are subject to capital gains tax on the profit. By donating the asset directly to a qualified charitable organization, you completely avoid paying this tax. The charity, which is tax-exempt, can then sell the asset and keep the full value. This strategy saves up to 23.8% on federal taxes, plus any applicable state taxes.
An Illustrative Example
You want to make a donation of $50k to your preferred charity. You have two options:
Less Effective: Donate Cash | More Effective: Donate a Security from your Portfolio | |
|---|---|---|
Donation method | You write a check for $50k and send it to the charity. | You donate a security whose current market value is $50k, but that you purchased for far less (say $5k). |
Benefit to charity | The charity cashes the check and receives the full $50k. | The charity sells the security and receives the full $50k. |
Your tax benefit1 | You claim a charitable deduction of $50k on your taxes, saving you $17,500 (assuming a 35% marginal tax rate). | In addition to the charitable deduction, you also avoid $10,710 in federal taxes you would have otherwise owed had you sold the asset ($50k proceeds – $5k cost basis = $45k capital gains, taxed at 23.8% = $10,710). |
Cost of donation | The donation effectively cost you $32,500. | The $10,710 in additional tax savings reduces the true cost of your donation to $21,790. |
As shown, while the charitable deduction lowers the real cost of any donation (cash or assets), donating assets lowers the cost even further. The government has essentially provided two ways to subsidize charitable giving, and by donating assets, you are able to take advantage of both, allowing you to give the same amount at a much lower cost. Depending on your portfolio and tax situation, the tax savings from donating assets can exceed Palisade’s investment management fee for the entire year.
How to Donate Assets
If you’d like to make a charitable donation, just tell your Palisade advisor how much you would like to donate and we will set up the donation on your behalf. This involves selecting the optimal assets to donate, figuring out how many shares to donate2, transferring the shares to your selected charity on your behalf, and summarizing the donation details for your records. All you need to do is decide how much to donate and sign the paperwork, and we’ll take care of the rest.
- This example assumes that the donor has a 35% marginal tax rate, a 20% capital gains tax rate, is subject to the net investment income tax, and is able to claim the charitable deduction. It ignores state taxes. ↩︎
- Donated securities should be highly appreciated and owned for longer than one year. However, if the donor isn’t itemizing on their return, they can donate shares that have been held for less than one year. ↩︎
