Charitable Contribution Question

[joesxm3]

When I had primarily earned income, if I made a charitable contribution I could deduct that from my AGI.

Now that I have primarily LTCG income and have quite a bit of that LTCG at the 15% rate, it occurred to me that if I make a charitable contribution I can still deduct it from my AGI but that would then shift a portion of the 15% LTCG back down into the 0% rate.

So, if I donate appreciated securities I can avoid paying LTCG on them. Plus avoid paying ordinary income taxes tax on some portion of that and as a bonus cancel off some 15% LTCG. Does it seem that my tax saving would be 12% + 15%?

I realize that there is probably a gap between my non-charitable deductions and the standard deduction and that I would have to carry forward any charitable deductions over 30% AGI if they are LTCG securities.

I will try to model this with Turbo Tax but I figured a sanity check might be in order. Grok-AI seems to think that what I described makes sense.

If I am taking profits this year and have a lot of LTCG and plan to put money into my donor advised fund in the next year or two it seems that doing it when I have a lot of LTCG makes sense?

 

[Closet_Gamer]

I think you're definitely better off to donate the security rather than sell it and then donate it because, as you say, you avoid the LTCG. In terms of the in-year income deduction, I do think you can deduct it though at the 12% bracket the standard deduction might wind up being better than itemizing. I'm not sure.

 

[joesxm3]

Well I must not be understanding something or maybe I set my Turbo Tax test up incorrectly.

I had no deductions entered so it was defaulting to the standard deduction.

I entered a charitable contribution equal to the standard deduction plus $10,000. Schedule A seemed to accept that and passed along the full amount.

I figured that my total tax should go down by 15% of the amount over the standard deduction i.e. $1500. Or by $2700 if my theory about 12% + 15% was true.

Well the tax went down by $1227.

I printed off the Schedule D tax worksheets but nothing jumped out at me at first glance.

I guess this would show that my idea of double dipping on the savings was a pipe dream unless I set something up wrong in turbo tax.

It just occurs to me that maybe the way it handles the ordinary income versus LTCG is backwards from what I was thinking. My ordinary income versus was less than the standard deduction.

Well don't waste a lot of time trying to figure this out for me. Probably not that big of a deal.

 

[joesxm3]

I double checked and I was not using the same amount for standard deduction that Turbo Tax was using.

When I adjusted my deduction amount to be $10,000 over that the tax went down by the expected 15% or $1500.

I guess my hoping that it would cancel the ordinary income and then knock 15% LTCG on top of that was a stretch.

I still am baffled since if I add to ordinary income it pushes LTCG up into the 15% zone.

The Schedule D tax worksheet does not seem to show the ordinary income. I will have to study it harder.

My situation is not that comp!ex.

We really need a simplified flat rate tax that people can understand.

 

[cathy63]

Set your ordinary income to the standard deduction + the bottom of the 15% cap gains bracket. Then give yourself say $100K of long term cap gains and calculate the tax. That situation should mean all ordinary income is taxed at 0% (the std deduction), 10% or 12% and all cap gains are taxed at 15%.

Now enter charitable contributions equal to the standard deduction + $10K. You should see taxes go down by $2700 as you remove $10K of ordinary income that was taxed at 12% and shift $10K of LTCGs that were taxed at 15% into the 0% bracket.

I just tried this using the dinkytown.net calculator and it works as expected.

 

[Out-to-Lunch]

So, if I donate appreciated securities I can avoid paying LTCG on them. Plus avoid paying ordinary income taxes tax on some portion of that and as a bonus cancel off some 15% LTCG. Does it seem that my tax saving would be 12% + 15%?

Don't forget that if you realized that capital gain and didn't do the donation, your tax bill would be higher than if you didn't do the donation.

If I read your post correctly, you compared tax bills where you did the charitable donation and when you did notihing at all. Did you compare your tax bills when you did the charitable donation and when you sold the stock and pocketed the money?

 

[audreyh1]

A Donor Advised Fund is an excellent way to donate appreciated securities. If you have a DAF affiliated with your brokerage they make it quite seamless. And yes, the unrealized gain doesn’t show up as income yet you still get to deduct the amount donated. The DAF gives you all the paperwork needed to report on Schedule A including the fair market value at the time of the donation.

In order to benefit in tax reduction by using Schedule A you may need to come up with addition deductions that put you over the standard deduction threshold. Of course if the securities are valuable enough that may do it. But sales and property taxes, potentially other items can be added together.

 

[joesxm3]

Cathy63,

Thank you for taking the trouble to work it out.

I was starting to think that my ordinary income was too low to trigger the 12% + 15% effect, I think . . .