5 smart ways to donate to charity

5 smart ways to donate to charity

On Behalf of | May 22, 2023 | Charitable Giving

Many people in New York have a renewed desire for peace of mind and meaning in the post-pandemic world. Charitable giving can help individuals express themselves by supporting issues they find important.

Charitable gifts can positively impact your community and help at a time when many nonprofits are dealing with urgent financial needs. These five strategies can help you make informed decisions about directing your charitable gifts.

Choosing the right asset

Cash donations do not provide the same benefits for you or the receiving charity as a donation of appreciated assets. Stock shares or similar investments you have held for over a year have likely appreciated and will reward you with a potentially larger tax deduction. The charity will receive a larger gift than if you sell the shares and gift them the cash.

By donating long-term appreciated assets, you can typically deduct the fair market value of your investment contribution. By selling the assets, you may eliminate the 20% capital gains tax on the appreciation and the 3.8% Medicare surtax you would otherwise incur.

Rebalancing your portfolio

Many investors are rebalancing their portfolios due to changes in current market conditions. For example, if you have too much of an appreciated asset in a risky sector, consider donating the appreciated stock as part of rebalancing instead of selling it. Keep an eye out for mergers and acquisitions activity involving companies in your investment portfolio that could trigger forced capital gains.

In either scenario, you can benefit from gifting the shares to a donor-advised fund. If you still want to own the stock, you can purchase additional shares at a higher cost basis, which could minimize your future tax liability when sold.

Donate instead of divesting

If you have an interest in a privately held company, such as a family business, consider donating it to a charity instead of divesting it. If you donate the interest to a donor-advised fund, you may receive a tax deduction for your donated shares at fair market value in addition to minimizing capital gains. If you were to donate to a private foundation, you would have to use the cost basis of your interest.

Offset a high-income event

If you have experienced a financial windfall, work bonus or unusually high-income year, consider donating to a donor-advised fund to reduce your taxable income. This charitable giving strategy is helpful if you are on the brink of a higher tax bracket or if your current financial circumstances may not happen in future years. When you donate to a donor-advised fund, your contributions continue to grow, resulting in more dollars donated to charity.

Roth conversions

Many people convert their traditional IRA to a Roth IRA to have tax-free income once they retire. You can offset the conversion’s taxable income by making a charitable gift.

Understanding strategic ways to make gifts to charity can help you support issues you care about while potentially reducing your tax liability.

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