Capital Gain & Charity & Tax Deduction

A lot of us are doing charity. Charitable donations are popular tax deduction.

Do you know that you can donate your capital gain and save on tax?

Let’s say, it comes to December and you know that you are planning to do charitable contribution of 10k.

Let’s assume that you have 10k in unrealized long term capital gain and are interested in selling it. As this is long term capital gain, you will need to pay long term capital gain tax on this. You can donate this 10k. By doing so you won’t need to pay long term capital tax. You will still be eligible for taking tax deduction for charitable donations.

Let’s understand this with a hypothetical example.
Let’s say for a particular tax year,
Taxable income = 100k
In addition of taxable income, long term capital gain = 10k
Charitable donation = 10k
Tax bracket = 25% (Let’s assume that your tax is flat and you pay 25% on your taxable income)
Long term income tax = 15%

In this situation, you will pay 24k in tax.
A. Previous taxable income of 100k – charitable donation of 10k = new taxable income of 90k
25% tax on this taxable income = 22.5k
B. 15% tax on long term capital gain on 10k = 1.5k
Total tax = A+B = 24k

What if you donate long term capital gain of 10k in charity?

In this situation, you will pay 22.5k in tax.
A. Previous taxable income of 100k - charitable donation of 10k = new taxable income of 90k
25% tax on this taxable income = 22.5k
B. 15% tax on long term capital gain on 0(since you donated 10k) = 0