When you write a check to make a charitable contribution, you typically get a tax deduction. However, you’re paying with aftertax dollars. You’ll do better by donating appreciated assets you’ve held longer than one year because you’ll be using some pretax dollars.
Suppose, for example, Ashley Walker wants to donate $3,000 to her favorite charity. Instead of just writing a check, Ashley goes through her portfolio and finds a mutual fund she bought years ago for $1,400. Her shares in that fund now sell for $3,000.
Ashley decides to donate her shares in this fund to charity. This way, Ashley also will get a deduction for $3,000–the current value of the donated shares. To Ashley, those shares are only worth $2,760: she’d have a $1,600 long-term gain on a sale and owe $240 in tax, at a 15% rate.
By donating the fund shares, Ashley gets a $3,000 tax deduction by donating an asset that would be worth only $2,760 to her, aftertax. The charity will owe no tax on a sale of the shares so it will collect the same $3,000 it would have had from Ashley’s check while Ashley is better off than she would have been by making a donation by check.
