This time of year, many businesses make donations to charities. This is a great way to support causes you believe in, while simultaneously getting a tax deduction. But, there are a couple of ways you can do this… One of them allows you to make free money (not pay tax on that income) and get a tax deduction!
If you have stocks that have gone up in value, this one is for you. Many people sell their stocks, and then donate cash to charity. What they don’t realize is that this is actually saving them LESS in tax than they could be saving and the charity is also getting less.
So, how does it work?
When you have a capital gain on a stock and you sell it, 50% of that gain is taxable at your current tax rate. So, you’re paying tax on that income, leaving you with less cash to donate to charity. This means you also have less of a tax deduction later because the amount you donated was less. If instead, you donate the stock itself to charity, you are not paying tax on the capital gain, you are receiving a tax deduction for the full amount of the stock, and the charity is receiving more money. Aka… Free money and a tax deduction for you!
When does it not work?
Sometimes, it’s not smarter to donate a stock instead of cash however. For instance, if your stock has gone down, you’re actually better off selling the stock, taking the capital loss and donating cash to the charity of your choice.
Get an example!
We explain the concept further and break down a full example in the video below. Be sure to give it a “like” if you find it helpful and to subscribe to our channel for more videos and tax tips!
