Q: Every year, I donate roughly $10,000 to charities. My accountant has never suggested I donate some of my appreciated stock instead of cash to save the capital gains tax. Am I missing something? Would it be wise to donate appreciated stock?
A: Yes. Here are some of the benefits of donating stock to charity:
Lower tax toll
You may be able to significantly lower your capital gains taxes by donating stocks, bonds, mutual funds, real estate and other assets that have risen in value and that you’ve owned for more than one year instead of cash. Even though you can get a tax deduction for the donation, whether it’s cash or stock, donating stock to charity can allow you to avoid capital gains tax on the appreciated asset.
You have $10,000 in cash and $10,000 worth of stock that you bought for $2,000 over one year ago. You sell the stock and donate the proceeds. You’ll get a tax deduction for the donation of cash, but you’ll owe capital gains taxes from the sale of the stock.
Instead, if you donate the stock, you’ll be able to deduct the value of the stock just like you could deduct the value of cash (subject to IRS deductibility limits that are beyond the scope of this article), but you’ll also avoid capital gains taxes on the stock sale because the charity is selling the stock. The charity will still get the full donation because it pays no taxes when selling the stock. So instead of selling the stock, give it to the charity and let it sell the shares.
Many charities are aware of this tax law and are skilled at facilitating the paperwork to get this done for you. They’re motivated because they want your donation, and you’re motivated because you want to lower your taxes. A rare win-win in the tax code!
You can also utilize a donor-advised fund, a charitable giving account administered by a public charity, which can help you support your chosen charities more easily. Instead of the hassle of donating multiple stocks to various charities, a donor-advised fund allows you to make one donation to your fund – leaving you with only one tax receipt to keep track of for your tax return. This is also a flexible option, giving you the ability to take a deduction for the current tax year and then support your chosen charities over time. This is done by recommending grants in a timetable that best suits you.
Get more, give more
The maximum federal capital gains tax rate is 20%. If you donate the appreciated stock that you’ve owned for more than a year directly to a charity, you can avoid capital gains tax. Donating stock to charity under these provisions can allow you to give a charity up to 20% more than if you sold the stock and used those funds to make a cash donation.
Looking to help mitigate risk and optimize portfolio holdings? It might be time to rebalance – and donating stock can be a boost to your portfolio needs. Building a donation strategy can allow your capital gains to fund philanthropic endeavors.
It’s great to give
Donating stock can be a great way to support your favorite charities and a financially savvy strategy to help make the most of your money. Want to learn more about ways you can optimize your financial plan with charitable giving? Connect with one of our financial planners.
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.