Receive Tax Breaks by Gifting Appreciated Securities

Supporting a favorite charity with your time and treasure is a noble deed. Your gifts to worthwhile organizations support the work underway that makes the world a better place for everyone. So give. Give generously. But know that all giving is not treated equally. Before opening your wallet, scan your investment accounts for any long-term held securities with significant appreciation.

Donating appreciated stocks, bonds, or mutual funds that you’ve held for more than a year can actually be better than giving cash.

That’s right.

For those who itemize deductions, a charitable deduction equal to the fair market value of the stock – on the day you initiate the transfer – is yours for the taking. The deduction maxes out at 30% of your adjusted gross income. You can also avoid capital gains taxes by gifting securities directly. That’s a win-win.

Let’s take this example.

  • You bought stock for $10,000 18 months ago. Today it’s worth $20,000. Your plan is to donate the entire amount to a charitable organization.

The following chart describes the positive impact that a direct gift of appreciated stock will have on your tax bill. Additionally, your charity benefits from an additional $1,500 that wouldn’t be consumed by capital gains taxes.

Sell All Shares & Donate Cash Gift All Shares to Charity
Capital Gains (15%) -$1,500 $0 (Savings of $1500)
Income Tax Savings (25% tax bracket) $4625 $5,000
Total Tax Savings $3125 $6500

 

Our tax code incentivizes a charitable nature. If the stock has appreciated, and you’ve held it for a year or more, then transferring the stock directly makes better financial sense than selling stock and giving cash directly. Securities held for less than a year only qualify for a deduction equal to the cost basis – the value you purchased the stock.

So choose wisely when transferring investments to your preferred organization and reap the tax benefits associated with a giving nature.

You can take advantage of the tax incentive before identifying the actual charity by setting up a donor-advised fund. Donor-advised funds can be established through your community foundation or any number of other organizations. They have the added benefit of allowing taxpayers to take advantage of a tax break immediately while allowing unlimited time to identify the qualified recipient organization. Your donation also grows tax-free.

A donor-advised fund can be opened with an initial investment of anyway from $5,000 – $10,000. This fund can be opened with cash, paper securities, or more complex investments like real estate holdings. Most funds charge an annual management fee in addition to fees associated with the underlying mutual funds that should be considered. The fees may be worth it to reap an immediate tax benefit until you can decide how best to direct your charitable donations.

If you want to gift stocks that have lost value, it’s best to sell them first and then hand over the cash. In this scenario, Uncle Sam allows you to deduct the capital loss when you itemize along with your charitable contribution.

Support your favorite charities with a gift of long-term held, appreciated stocks, bonds, or mutual funds instead of cash to receive maximum financial benefit. The tax advantages will keep more money in your pocket while you continue to support the good work happening around you.

Schedule an appointment to speak with a Precedent Asset Management financial planner about how to maximize your tax savings with your charitable donations.