Cash: a popular gift
Charitable organizations commonly receive gifts in the form of cash, checks, and direct deposits. Cash gifts can be convenient for many people and are easily recorded through receipts and bank records. Remember that it is important to save all receipts to assure maximum tax savings.
Non-cash gifts: enjoy more savings
People often choose to make gifts in forms other than cash. Popular examples include:
- Securities (stocks, bonds, mutual funds)
- Real estate
- Retirement plans
- Life insurance policies
- Other items of value (jewelry, artwork, collections, antiques, automobiles, etc.)
After considering the properties you own, you may find giving something other than cash to be an appealing alternative. Giving non-cash property may enable you to help organizations in which you believe while conserving cash for other uses and enjoying what may be greater tax savings than those provided by gifts of cash.
When property is worth more
If you have non-cash property, such as stocks and mutual funds, that is worth more than you paid for it (appreciated) and has been held long-term (more than one year), you can generally enjoy greater tax savings from giving such property than from giving an equivalent amount of cash. That's because a gift of property that is worth more than it cost lets you bypass capital gain tax that could be due if you sold the asset. You are also entitled to a charitable deduction based on the property's current value, including any "paper profit."
Jordan is in the 33% tax bracket and would like to make a $5,000 gift for charitable purposes. Should the gift be in the form of cash? Or would it better to give stocks, bonds, or mutual funds of the same value that are worth more than they originally cost? Jordan is in a 15% capital gain tax bracket.
If the gift is in the form of cash, the deduction for federal income tax purposes would be $5,000, saving $1,650 in taxes. If stock valued at $5,000 that was purchased more than one year ago or more for $1,000 was given instead, the following would result:
- A charitable income tax deduction for $5,000, saving $1,650 in taxes (just as in the case of a cash gift), plus
- Avoidance of capital gains tax on the $4,000 increase in value, a $600 savings (15% capital gain tax rate x $4,000)
Note that the after-tax cost of the gift of stock worth $5,000 is just $2,750 ($5,000 - $1,650 - $600). Comparing that to the $3,350 after-tax cost of giving cash ($5,000- $1,650), it is better to give the stock and thus make the same gift to charity at a $600 lower after-tax cost than the same gift made in the form of cash.
NOTE: This calculation is provided for educational purposes only. The type of assets transferred, the actual date of the gift, and other factors may have a material effect on the amount or use of your deduction. You are advised to seek the advice of your tax advisors before implementing a gift of this type.
Planning Tip: If you like all of the securities you own and cannot decide which to give, simply select the stock with the lowest cost basis and give it. Repurchase the stock at the time you make the gift with the cash you would have otherwise used to make the gift. This will increase the basis in your stock to 100% and save you capital gains taxes in the future should you sell the stock. This may also make it possible to benefit from a loss deduction should the stock decline in value before it is sold.
Giving property that has declined in value
If you have stock or other investment property that is worth less than it cost, you will normally save more in taxes by selling that property and giving the proceeds. You may then be able to claim a capital loss on your tax return. You can also deduct the cash proceeds you give as a charitable gift. The result can be to enjoy tax deductions that actually total more than the current value of the asset, while making a meaningful gift.