This time of year, many of us turn our thoughts to giving. In fact, according to money.com, TIME’s financial website, December is the top month for financial giving. With all of the hustle and bustle, it can seem easy to simply write a check to your favorite charity or place of worship, but that might not be the tax-savviest way to donate. A gifting strategy that can provide significant tax benefits for individual investors is giving charities shares of appreciated stock or securities.
With the stock market trading around all-time highs, many of us have at least a few investments that have done quite well over the last few years. Do you have stocks or mutual funds in your taxable account that have increased in value? Perhaps significantly?
Or perhaps your grandmother gave you XYZ stock every year for your birthday, but now it’s becoming too large of a percentage of your portfolio? This appreciated stock or mutual fund may be an excellent way to support your favorite charity or alma mater this year.
Most charities are able to accept transfers of stock or security holdings directly from your taxable investment account. By gifting these appreciated securities, as opposed to cash, you can give away the capital gain. Capital gains can generate taxes when you sell the security.
For example, if you bought a mutual fund for $1,000 and it increased in value to $2,000, you would have $1,000 embedded capital gain that could generate capital gains tax when you sell it. If you wanted to sell that mutual fund, you would have to pay $150 in federal long-term capital gains tax (I’m making some assumptions here about your tax bracket and holding period; you could owe more or less), plus $57.50 in Virginia state capital gains taxes. This means that after selling that mutual fund, you would have $1,792.50 left over to donate to that charity.
Yet, if you donate that mutual fund directly to the charity, the whole $2,000 could be put to work by the charity.
There are a few important points to remember when gifting appreciated securities. First, you must have held the stock or security for at least one full year (365 days) before you donate the security in order to be able to take a deduction on the full market value. If you have held the stock or security for less than one year, you will only be able to deduct what you paid for the stock – this amount is known as your cost basis.
Second, it may go without saying, but just in case – the emphasis here is on appreciated securities. If you have a stock or mutual fund that has lost money since you purchased it, then this giving strategy probably wouldn’t make sense for you. It may make more sense to sell the stock or security at a loss and donate the proceeds, use the tax loss, and then reinvest in your portfolio with outside cash. Talk to your tax preparer or financial advisor.
Third, gifting appreciated securities are subject to the same limits as gifting cash: You can generally deduct donations up to 30 percent of your income made to public charities or 20 percent of your income for gifts to private foundations. Then you can use the cash you were going to donate to reinvest in your taxable investment account.
People are sometimes worried that this is a complicated transaction to complete. In truth, this is easier to accomplish than it might seem at first glance. I don’t recommend waiting until the very last week of the year to put this strategy in place, but a week or so should be enough time for your investment advisor or mutual fund company to process this transfer. If you work with a financial advisor, she can walk you through the process.
Even if you are currently investing on your own, you can easily reach out to the charity you have in mind and tell them you want to donate appreciated securities. They will provide you with the information you need to give to your custodian (the business that holds your accounts and sends you monthly statements). Your custodian probably has another form for you to sign and submit with the transfer instructions from the charity. Sign the form, send it in, and sip your hot cocoa as you congratulate yourself on tax-savvy charitable giving.
A few more quick tips:
• Investigate the charities you contribute to using sites such as charitynavigator.org or guidestar.org to make sure the organizations you support are good stewards.
• Make sure the charity you select qualifies for tax-exempt contributions.
• Keep track of your donations (check copies, e-mail or paper receipts, etc.) and save the back-up documentation in your tax file.
• Check with your tax advisor to see if this strategy makes sense for you.
• If you are over age seventy-and-a-half, you can donate directly from your IRA as well. If that applies to you, talk to your tax advisor about carefully
tracking this transaction.