Many people donate substantial amounts to charity each year. If you do, without the help of a top Salt Lake City financial advisor, you may not know that you can use those charitable contributions to reduce capital gains taxes. The scenario looks something like this:
Let’s say you are the owner of a taxable investment account with a basis of $15k. If the market value of that amount is $20k, then $5k will be subject to capital gains tax. Capital gains tax can range from 0% to 20%, depending on your income. If you are in the 12% income tax bracket, your capital gains tax is 0%, so the following strategy is only helpful for those in higher brackets.
Rather than donating straight to your charity, as you typically would have, directly give the charity actual shares in the stock, mutual fund, or ETF. Using our previous scenario, you would donate $20k to charity from your account. Then, you would put the $20k you would have donated back into the same holdings you just gave, increasing your cost basis from $15k to $20k.
The end result is that you own the exact same holdings as before, but you’ve increased your basis in the account, so you will pay fewer taxes when you sell those holdings down the road.
Your taxable account is likely much more complex than this simple scenario. It will have more funds and a variety of diverse assets. In that case, you would typically want to donate the assets with the largest gain.
As you manage your accounts and strive to minimize tax liability, consider working closely with a financial advisor you trust. At TrueNorth Wealth, we are fee-only financial planners local to the Salt Lake City area. We are committed to creating a financial plan that is catered to your individual needs, and we are happy to assist you every step of the way. Contact us today to learn more.