Tom Cronin, CFP, is Vice President of Eastern Investment Advisors in Boston and is active supporter of The Ray Tye Medical Aid Foundation.
The United States government provides incentives for Americans to give to charity by allowing tax benefits. Most Individuals are aware of these and take advantage of the income tax deduction when giving to charities. However, there is one tax benefit that is not typically utilized by charitable minded Americans, and that is the avoidance of capital gain when gifting appreciated assets—stocks in particular.
If you have highly appreciated stock and are giving cash to charities you may be missing an opportunity of receiving another 15 cents on the dollar in tax benefits. For example, Jane Doe realizes that she needs to give $10,000 to charity by the end of this year. Instead of writing a check, Jane will gift $10,000 in appreciated stock, which has a practically $0 cost basis. Gifting $10,000 of appreciated stock versus $10,000 of cash provides the same income tax benefits—a tax savings of 40.3% ($4,030) for the top taxpayer in Massachusetts. However, the gift of stock provides an additional capital gain tax benefit of $1,500. That is a total tax savings of $5,530 in the stock example.
For many Americans, gifting appreciated stock is not only more tax advantageous, but it also provides powerful diversification benefits to one’s portfolio. Work with your advisors to determine if gifting appreciated stock makes sense for you. It’s also easy. You simply send a letter of authorization to your investment manager instructing a transfer of stock in-kind to the charity. The investment manager and the charity handle it from there. Don’t ignore this extra tax benefit. It’s the smarter way to give and is just as easy as writing a check! ***********
A 5-Step Guide to Wise Charitable Giving
1. Clarify your values and trust your instincts.
2. Identify your preferences. Ask yourself: “What is important to me—the environment, education, hunger, animal welfare, helping sick children? Should the charity be operated locally, regionally, nationally or internationally? Do you wish to support a large or a small charity, a new or an old one?
3. Research web sites and brochures to find charities that are in line with your interests.
4. Verify that the charity has an official IRS 501(c)3 rating as a tax-exempt organization.
5. Compare charities that do similar work. Look at their finances, particularly their operating costs. Be sure they are willing to share information with you.
