Whenever you have the ability to donate to people in need, everybody wins. You’ll feel good because you provided for someone who was without, and the beneficiary received the much-needed help. But did you know that there’s a way to give to charity that gives you more than just the warm, fuzzy feeling of having done a good deed? If you invest in stocks, you can donate appreciated assets to charity and come out ahead through a charitable donation tax deduction.
Charitable Donation Tax Deduction to Lower Income Tax
How Does This Work?
Suppose you were going to donate $4,000 to your favorite charity this year. You could write a check for the donation, which would come straight out of your checking account. However, if you have assets that you’ve been holding for at least one year, you can donate $5,000 of your stock instead. If you purchased a stock 2 years ago for $500, and it doubled its value each year, you’re now looking at $4,000 in appreciated assets! If you donate that $4,000 to your favorite charity, you’ll receive a $4,000 charitable donation tax deduction, and you’ll never have to pay taxes on the $3,500 gain.
Factoring Charity into Estate Planning
So we now understand how donating your appreciated assets can benefit everyone, benefactor and beneficiary alike. Your favorite charity gets every dollar you intended to give, and you don’t have to pay taxes on your appreciated assets (and get the donation deduction). But what about when you’re preparing your estate plan?
Let’s imagine you have two assets when you pass away; $100,000 in a traditional IRA, and $100,000 in appreciated stocks. Let’s ignore that the likelihood of this scenario is slim-to-none; who only has two assets of equal value? But that’s not important. So you want to leave half of your assets to charity, and half to your daughter Susie.
If you leave your traditional IRA to your daughter, upon the inheritance she’ll have to pay income tax on all the distributions from that IRA. If her current effective tax income rate is 40%, she’ll only be inheriting $60,000 after paying the required taxes.
However, if you leave the traditional IRA to your favorite charity instead, they wouldn’t be affected by taxation, because charities are tax-exempt! They would be able to withdraw the full $100,000 from your traditional IRA without paying any taxes on it.
If you go that route, you could then leave Susie your appreciated assets. Currently, the law dictates that those assets would get a basis step-up to fair market value on the date of your passing. Susie could then sell the assets for $100,000 and owe no taxes at all.
The Best Ways to Give Back
There you have it: give to charity through appreciated assets now, and leave your traditional IRA to charity later! This is the best way to donate to charities that you believe in, ensuring that they get everything you mean for them to, and you and your family are taken care of as well.