Reflections

Stop Giving Your Cash to Charities (Use Appreciated Stock Instead)

Donate appreciated stock for a bigger giving impact and more tax savings

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It is a great feeling to give some of your wealth to a worthy cause when you have a charitable intent. Any organization that you support becomes better-off with additional funds that they can use towards their mission. You also earn a tax deduction for donated amounts that can take a bite out of your tax bill. If you are giving cash to a charity there is however a better strategy that will increase both the amount of money you can give an organization and the size of your tax savings.

Gifting long-term appreciated stock, as opposed to cash, benefits both the charitable organization and the donor. The reason is that anyone who donates stock that has appreciated in value (and held at least 12 months) is able to deduct the full value of the investment without being forced to recognize the capital gain in the process. By donating appreciated stock, your capital gain disappears entirely, allowing you to permanently avoid any long-term capital gains tax liability that you would otherwise owe in the future.

Case Study

To visualize the benefits to both the charitable organization and the donor, consider the below example of Mrs. Stock and Mr. Cash. Both parties purchased shares of Home Depot for $10,000 several years ago and their investments are now worth $40,000. This year they each earmarked $40,000 as available to give to a charitable organization.

Mr. Cash decides to sell his Home Depot stock to raise cash for his charitable gift. By realizing a gain of $30,000, he must pay $7,140 in federal taxes (20% capital gains rate + 3.8% Medicare tax). He writes a check for the remaining $32,860. Assuming he is in the 33% tax bracket, his $32,860 charitable deduction provides him with $10,844 in tax savings.

After analyzing her situation with an advisor, Mrs. Stock has made plans to donate her Home Depot stock directly to her charity of choice. This transfer does not require her to sell any part of the investment or trigger any gains. The charity organization receives the full value of the investment (and is not required to pay any capital gains tax once liquidated in their account). Mrs. Stock also receives a charitable deduction for the full $40,000 value of the investment. If Mrs. Stock is also in the 33% tax bracket, her $40,000 contribution generates a tax savings of $13,200.

In summary, Mrs. Stock can give $7,140 more to charity and realize $2,356 more in tax savings simply by donating appreciated stock versus selling it and giving cash.

Donor-Advised Trusts and Annual Gifting

Those wishing to establish ongoing charitable donations or annual gifting to family members can also benefit from using appreciated stock to fund these goals.

For those who are already charitably inclined, a donor advised fund can be an outstanding way to donate a large sum of money and reap an immediate tax benefit. A donor advised fund allows you to donate assets to charity today – and receive a tax deduction now – even though the money doesn’t have to be granted to the charity until sometime later. Taxpayers can “front load” charitable contributions during a high-income year to maximize the value of the tax deduction, and then use the portfolio of assets to distribute gifts over time. In the meantime, assets inside the donor advised fund grow tax-free. By funding a donor-advised fund using appreciated stock, you receive the added benefit of removing capital gains from your portfolio.

The same strategy can be used to fulfill an annual gifting plan. Many families choose to make gifts to their children up to the annual limit of $14,000 for individuals and $28,000 for couples as part of a long-term estate plan. An annual gifting strategy compounded over many years can remove incredibly meaningful sums from a taxable estate. Gifting appreciated stock is a tax-smart way to accomplish an annual gifting plan, as you avoid capital gains by gifting them away. Should the stock later be sold, it is often done by a child in a lower tax bracket.

Summary

Cash donations are rarely the most effective form of charitable giving. Donating appreciated stock gives you the most giving impact and tax savings, and nearly all charitable organizations are equipped to accept transferred securities. Keep in mind that the larger your investment gain and the higher your tax bracket, the more impactful a gifting stock strategy becomes. It feels great to give to a worthy cause, but it feels even better to pay less tax while giving more.

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