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Minimizing Your Taxes When Giving to Charity

Giving To Charity Is More Than Just Giving Cash

IRA-300x199Most people give to charities for two reasons. They love what that charity is doing, and they want to get a deduction on their taxes. Whether they give to a church, a group, or any other 501(c)(3), they will be able to write off what they donate to that group. What many people don’t realize is that the IRS allows donations to be made over and above cash donations. In fact, you can give anything of value and write it off on your taxes. Your accountant in Billings, Montana explains method that lets both you, and the charity of your choice, come out ahead.

Giving to Charity by Donating Securities

Many of us have investments. They are set up in order to grow faster than inflation so that when it comes time to retire (or to use those investments for their desired goal), we have far more than if we had simply put the money into a basic savings account.

The problem arises, however, when it comes time to withdraw those funds. Unless the money is in a Roth IRA, there will likely be large capital gains on the account. This means that you may have to pay a considerable sum in taxes before you can donate the money. Let’s take a look at the math.

Suppose you invest $10,000 and over the next 10 years that grows to $100,000. You don’t need the money, and you have a charity that could use it. So you cash in your investment. Unfortunately there is $90,000 worth of growth; resulting in about $13,500 in capital gains taxes (at 15%, your tax rate may vary). So you really can only give your charity $86,500. There is a better way.

You can donate $100,000 worth of stock (or other securities) to that charity, even if there are significant gains in the account. Here is where it gets good.

When the securities change hands, the cost basis doesn’t go with them. So even though you only paid $10,000, the new basis is $100,000. Your charity can sell the investment, and not worry about any taxes on it. You get to write off the full $100,000; they get to keep the full $100,000.

In our first scenario, you get to write off $86,500 on your taxes, helping you save $21,625 (minus the $13,500 you have to spend you have a net tax savings of $8,125). In our second scenario you write off $100,000 helping you save $25,000 off your taxes. These, of course, are assuming a 25% tax bracket.

Keep in mind there are some limitations on this method. You can read all about those limitations on the IRS website. Of course, you probably don’t want to spend your time doing that, so when tax season is approaching, you can just ask your accountant in Billings, Montana what to do.

Practical Taxes

Practical Taxes is a full service accounting firm in Billings, Montana. Tax season is drawing to a close, but it is never too early to start preparing for next year’s taxes. If you have accounting needs, including tax preparation, online payroll services, business consultation, or the like, schedule an appointment by calling 406-894-2050.

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