During the year-end holidays, you may be making charitable contributions. If possible, donate appreciated securities instead of writing checks. You’ll avoid paying taxes on the appreciation and thus enjoy greater tax savings.
Suppose, for example, you have agreed to contribute $4,000 to a local charity this year. To raise the money you might sell $4,000 worth of stock you bought years ago for $1,500.
On such a trade, you’d have a $2,500 gain and you’d owe $375 in federal income tax, at a 15 percent rate on long-term gains. If you’re in a 28 percent bracket for regular tax, you’d save $1,120 by making the donation (28 percent of $4,000), reducing the cost of the gift to $2,880, but your $375 tax payment would bring the net cost up to $3,255.
Instead, you could simply donate the $4,000 worth of stock. You’d get the same $1,120 tax saving without owing capital gains tax so your net cost would be $2,880, not $3,255. To make this strategy work you need to donate appreciated assets held more than one year.
