Most donors know about the tax benefits of making donations to a qualified non-profit, such as 6th Street. For example, if you’re in a 28% federal and 9% California tax bracket, a $5,000 contribution to the Playhouse can save you $1,850 in taxes. However, I’m surprised by how many of my investment clients are unaware of the additional tax benefits of donating mutual funds or common stock.
Suppose you have a mutual fund that is currently worth five times what you paid for it (if you’re of a “certain age,” that’s not much of a stretch – I have several mutual funds in my portfolio that are worth almost 10 times what I paid). If you sold $5,000 of that fund, you would report a gain of $4,000, and, depending on your income level, you might pay 20% in federal capital gains taxes, plus 4% investment income tax and 9% state income tax, totaling $1,320 in taxes. If you donated $5,000 of that fund to the Playhouse, all of that tax burden disappears, and you get the same $5,000 deduction on your 2013 taxes as if you donated $5,000 in cash. That means the $5,000 donation, less the tax savings of the deduction and the capital gains taxes, effectively costs you only $1,830!
How difficult is this donation to accomplish? It depends on your advisor, broker, or mutual fund provider. For many advisors and brokers, there is a standard form to complete, and it might take you 15 minutes or less to complete. However, because many financial institutions get very busy near the end of the year, if you want to take advantage of the tax deductions for 2013, you should submit the paperwork by early December.
I need to add one qualification – every tax situation is different. The numbers I used reflect my own tax analysis, but you might have other tax liabilities or credits that make the effective tax savings higher or lower for you. If you use a tax accounting or investment advisory firm, you should consult them before assuming you will receive the same tax benefits.