Blog - Cash Isn't Always King


Jessica Smith
Vice President
Director of Financial Planning

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Whether in the business or investment world, you’ve undoubtedly heard the phrase “cash is king.” The idea is that cash may be the best investment because it gives you options. Whether it is the opportunity to invest during a falling market or for a business to make an acquisition or investment, cash serves an important purpose. However, cash may not be king when it comes to charitable donations.

 

Tax law allows for favorable treatment of charitable donations. You can receive a deduction, if itemizing, for every dollar that you donate to a 501(c)(3) company (nonprofit). The deduction is limited to 50% of your Adjusted Gross Income (AGI) for donations to public charities and 30% of AGI for donations to private charities. The value of that deduction depends on your marginal federal and state tax brackets. For example, if you are in the 25% federal tax bracket and the 5% state tax bracket, each dollar given to charity is worth .30 cents of tax savings to you. This is a pretty sweet deal, right? You can save taxes by donating to causes and nonprofits that matter to you. BUT...the deal can be sweeter.

 

If you own an appreciated asset, like a stock or mutual fund, that has been held for over a year, then cash is no longer king for you. Instead, you get more benefit per dollar (and more options) by donating the appreciated asset to the charity because you not only receive an income tax deduction for the market value of the stock or mutual fund, but you also bypass the capital gains tax on any growth in the investment. This is a huge win-win. You get more tax savings and the charity still gets the benefit of the gift. Here’s an example:

 

 

Cash

Appreciated Asset

Fair Market Value

$10,000

$10,000 (purchased for $4,000)

Long Term Capital Gains

$0

$6,000

Charitable Donation

$10,000

$10,000

Capital Gain Tax Avoided

$0

$900 (assuming 15% federal)

Non-taxable Amount

$10,000

$10,900*

*Total Tax Savings is increased if you pay state income taxes

 

Using an appreciated asset resulted in 9% more tax savings in this scenario than a direct cash donation.

 

Please notice that I said that cash may not be king. Deductions for appreciated assets are limited to 30% of AGI for donations to public charities and 20% for donations to private charities, which are more stringent than the limits for cash donations. Therefore, for a donor who is brushing up against these deduction limits, a combination of asset donation and cash donations should be considered.

 

Please contact your advisor if you are interested in learning more about donating appreciated assets.


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