Taxes can be a significant factor that people analyze when considering financial decisions. For example, evaluating the cash deduction limits between donor-advised funds (DAFs) and private foundations exposes which vehicle can potentially create a greater tax advantage. While most individuals may be eager to take advantage of the greater deduction limit of cash versus long-term appreciated assets, research suggests that there can be a better tax advantage in considering a mix of both assets.
In addition, when you donate appreciated securities to a qualified charity, the fair market value is deducted from your taxable income. As a result, neither you nor the charity will be taxed on the capital gain. Therefore, a greater impact could happen with your charitable contribution by gifting your securities rather than liquidating them and donating the cash that remains after 23.8% in federal capital gains tax has been collected.
Another advantage in analyzing the value of donating long-term securities is in the event of rebalancing. When a portfolio has drifted from its target allocation, it’s time for rebalancing. As you reduce significant exposures, contributing lower cost-basis long-term holdings will decrease the tax hit of rebalancing. A tax professional can help you determine the most tax-efficient strategy for your circumstances.
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