If you have capital gains, and you give tzedakah as well, you can come out ahead on tax.
If you have a long-term capital gain (LTCG) stock, with significant appreciation in value, there is a great tax play you can do. This also assumes you are one to give charity, though.
First, what is a LTCG stock? In the American tax rules, this is a stock which has been held for more than one year.
Here’s a simple example to illustrate the subject of this short article:
Jack bought $10,000 of Amazon Stock many years ago, which is now worth $100,000. Jack has other net taxable income in the year of $200,000 (net of his other deductions, etc.). He decides to sell his Amazon stock, for which he has a LTCG of $90,000. Therefore, for this tax year, Jack has taxable income of $290,000, and a big tax bill. He decides to give $50,000 to charity and lower his taxable income to $240,000.
Now, if instead of Jack making these separate transactions, if Jack were to give the appreciated stock directly to the non-profit (note: the non-profit would have its own broker to facilitate this, which is common amongst non-profits), the tax outcome comes out much better, he actually does not have to pay any tax on the LTCG stock for which he donates, and gets a deduction for the current fair market value (FMV) of the stock. So in the above example, if Jack gave half of the Amazon stock to the charity directly, and sold the other half on the open market, he would have the same $50,000 charity deduction, but his taxable income ultimately would only be $195,000 (the other $200,000 plus the $45,000 gain on sale of the half of the Amazon Stock less the $50,000 charity deduction), in other words, in this example, his taxable income would be $45,000 less, getting a double deduction on the LTCG.
Don’t Want to Donate It All to One Place?
Another thing to consider in this, if one is new to having wealth, is to set up what is called a “Donor Advised Fund” (DAF), which all large stock brokers (e.g. Fidelity) will set up for minimal fees and administrative burden. A DAF will enable the donor to get the charity deduction now, yet procrastinate giving the charity until a later date, or in many small amounts over many years in the future. And yet, for even more control over the “charity” one can make a full blown “Charitable Foundation,” which generally is facilitated by a tax accountant, be it a CPA or not, CPA’s probably more commonly used for this.