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Charitable Donation to Balance Capital Gains

Forum|Forum|5 years ago
April 9, 2021
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I am interested in a strategy to reduce tax burden from capital gains.

For example, let's assume we have someone at the highest capital gains bracket for long term gains and for the sake of this question assume a tax rate of 50% to make math easy.

If I liquidate $12k of assets with a capital gain of $10k, then the tax due on that is $2k. Now, if we donate $4k, would that mean that there will be no tax burden when the transactions are combined.

Best answer by AnnetteB6

No, it won't exactly work that way because your charitable donations on their own are not deductible.

Charitable donations are part of Schedule A Itemized Deductions. So, in order for any charitable donations to have any effect on your return, you must be able to itemize deductions by exceeding your standard deduction. Then, either your standard deduction or itemized deductions will reduce your taxable income. Once that happens, then your suggested calculation is more valid.

If it is possible in your situation, the most effective way to offset capital gains is to liquidate and asset that will generate a capital loss. The loss will offset the gain and thus reduce the total capital gain tax.

A

AnnetteB6Answer

No, it won't exactly work that way because your charitable donations on their own are not deductible.

Charitable donations are part of Schedule A Itemized Deductions. So, in order for any charitable donations to have any effect on your return, you must be able to itemize deductions by exceeding your standard deduction. Then, either your standard deduction or itemized deductions will reduce your taxable income. Once that happens, then your suggested calculation is more valid.

If it is possible in your situation, the most effective way to offset capital gains is to liquidate and asset that will generate a capital loss. The loss will offset the gain and thus reduce the total capital gain tax.

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S

saudahmirzaAuthor

Thanks for your help.

We itemize deductions as we exceed standard deductions. Based on that, would the above be an effective way to reduce tax burden by counter tax gains with donations?