Continuing on from yesterday’s discussion on the Charitable Donation Tax advantages and how it works, I’ll now move onto some of the strategies that I’ve come across to maximize the tax credit.
Some of you may be just starting out on your charitable giving pursuit and donating less than $200/year. Here are some tax strategies to maximize your tax credit return.
- If you have a spouse you can add all the charitable donations for that year under ONE spouse.
- You can carry forward your donation tax credit up to 5 years and only use the $200 limit once. For example, if you donate $100 every year, instead of getting the lowest tax credit every year, you can carry it forward up to 5 years so that out of your $500 donated, $300 will be given a tax credit at the highest marginal rate. In Newfoundland, that would result in a difference between getting $130 back or $197.56 after 5 years.
For those of you who are more affluent, you may want to donate stock instead of cash. With the new tax rules, donating stock to charity will result in 0% capital gains and a tax credit for the market value of the securities donated.. If you have a big capital gain on a stock and you want to sell, you can donate a portion of your gain to charity to reduce your capital gains tax to $0!
- Tim Cestnick describes the number of shares that you can consider donating to reduce your capital gains tax payable.
… donate $20,000 worth of XYZ shares to charity and sell the rest worth $80,000. The result? The tax on the $80,000 worth of shares sold is $9,200. The tax on the $20,000 worth of shares donated is zero.
The donation tax credit for those donated shares will be $9,200 — exactly enough to offset the tax on shares you kept for yourself and sold to reinvest. You’d be left with $80,000 in your pocket after the donation (and no taxes).
Now, keep this formula handy:
- The amount you donate to charity should equal the fair market value (FMV) of all the shares ($100,000 in our example)
- Multiplied by the capital gain on the shares ($50,000).
- Then, divide that answer by the following: Three times the fair market value (3 x $100,000) less the adjusted cost base (ACB) of the shares ($50,000).
- The answer is $20,000 in our example.
In algebraic terms: Donation = (FMV)(FMV – ACB)/(3FMV – ACB). This formula will allow you to determine the exact value of the securities to donate to eliminate your tax. Call me a math geek, but it works every time, regardless of your tax rate…
Although the tax credits are great, I’m a firm believer in helping those who are less fortunate and donating to charities is one way to do this.
Do you regularly donate to charity? If so, which ones are your favorite?