How to save money on taxes this holiday season

This may be controversial, but I’m willing to bet that most people who donate money do so in a suboptimal way due to their tax situation. This is a missed opportunity to potentially save thousands of dollars in taxes by leveraging valued resources that benefit the organization you want to help and save more on taxes. Let’s take a look at what this might look like and how you can take advantage of it.

Often people give cash and do not consider the possibility of transferring shares. They may want to donate cash, but don’t have the amount they want to give, and instead sell the stock first and then donate the proceeds. However, this is the least tax-efficient method – creating a taxable event when they could instead simply gift stock to the organization while still receiving a deduction and not triggering a taxable event. Let’s look at an example below.

Let’s say Andy wanted to donate $100,000 to his favorite charity and Andy was in the 35% marginal tax bracket. Andy could give $100,000 cash and itemize, get a $100,000 deduction, which in return would save him $35,000 in taxes. Not a bad payoff for helping his favorite charity.

However, Andy has no money in cash and instead decides to sell some of the stock in his investment account to receive $100,000, which he then donates to the organization. By doing this, Andy triggers a taxable event and a capital gain of $60,000, which causes him to pay a capital gains tax rate (Fed, state, and NIIT) of 29.55% in Georgia, or $17,730 in taxes. So, although he received a $35,000 deduction for the donation, it was offset by a taxable event and essentially saved him only $17,270 in taxes.

A better option for Andy would be to donate $100,000 of stock to charity, thereby generating no capital gains and saving significantly more on taxes. As a result, because Andy donates the stock, he not only saves $35,000 in taxes, but also $17,730 in capital gains tax that he would pay in the future by selling the stock. This results in a potential total tax savings of $52,730 for an actual total gift cost of $47,270. Below is a chart showing this exact example.

As the holidays and the end of the year approach, you may want to donate to a charity or other organization, and I encourage you to do so. There really is no better feeling than helping those in need or supporting causes that are doing great work. However, consider the impact this may have on your finances and how you can optimize your donation from a tax perspective. You can contact your private finance director to discuss more; will be happy to help you choose the best way to give to charity this holiday season!