Most people are aware they can get an income tax break for making monetary contributions to certain charitable and religious organizations. Most people also know they can get a similar income tax benefit for donating used clothing and other items to certain charitable groups and organization. What they may not realize is that they have other donation options available that can yield similar tax benefits. Read on to learn how to save on taxes this year.
Giving Appreciated Assets When Donating to Charity
One thing many people do not realize is that they can give appreciated assets when donating to charity. The appreciation escapes capital gains tax, and you get to deduct the full value if you’ve owned the asset for over a year.
For example, if you purchased 100 shares of XYZ Company for $10 per share in 2009 and that stock is now worth $15 per share, you have two ways you can make a donation to your favorite charity.
First, you could sell the stock for its current value of $1,500, then donate the $1,500 to the charity. When you do your tax return, you claim the $1,500 donation on Schedule A as a charitable donation. Then, you have to show the purchase and sale of the stock on Schedule D where you report a profit of $500 ($1,500 sale proceeds minus $1,000 cost basis). This profit is income on which you pay long term capital gains tax because you owned the stock for more than one year.
Alternatively, you could donate the stock directly to the charity. Again, you can deduct the full value of the stock ($1,500) on Schedule A as a charitable donation. In this case the appreciation escapes capital gains tax and you still get to deduct the full value because you have owned the stock for more than a year.
By donating appreciated assets as described above, the charity of your choice gets the full benefit of the value of the asset, you get an income tax deduction, and you can avoid tax on the appreciation. This is a win-win situation for both you and the charity.
Keep in mind that deductions for donations are reduced when adjusted gross income exceeds $254,200 for singles, $279,650 for heads of households, and $305,050 for married persons.
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