Charitable Gifting with Appreciated Securities

By Anne Marie E. Ashworth, CFP®

A charitable gift can be in the form of time, money, or in-kind donation. Whichever the case, the goal is to have the most positive impact possible—on both the recipient and the donor. Certain strategies in your giving decisions can “supercharge” your generosity. Consider donating shares of appreciated securities directly to a qualified charity if: 1) you make large charitable donations; 2) you frequently sell and realize capital gains on which you have to pay tax; or 3) your portfolio needs to be re-balanced to match your original goals due to the recent bull market.

Gifting shares of a stock, mutual fund, or even real estate that have appreciated significantly since you purchased (or inherited) the investment is one avenue to enhance the significance of a charitable donation. While the majority of charitable donations are cash, gifting appreciated securities could be an effective way to support the causes you care about and, at the same time, save on taxes. Think of it as a win-win scenario: when you give appreciated securities to a charity, you can deduct the market value of the stock at the time of the donation, and the charitable organization is allowed to sell the stock without paying capital gain taxes.

Two points to keep in mind if you choose to gift appreciated securities. First, you will only benefit if you gift shares that have an accrued capital gain. If your shares have not appreciated since you purchased them or have even declined in value, you will not save any capital gains tax by donating them to a charity. You will, of course, still get a charitable deduction for the value of the shares, but it would be no different than donating cash. (You would also be giving away a tax break that you would have received in the form of a capital loss.) Second, you should only donate securities that you were otherwise going to sell. The tax (up to 20%) on capital gains only applies when you sell your investment.

The government provides tax incentives for charitable contributions of appreciated investments. Not surprisingly, there are rules for receiving maximum tax benefits. The Tax Cuts and Jobs Act raised the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly (inflated annually). By itemizing, you can deduct charitable contributions up to 30% of your income if you donate appreciated assets. (The figure is up to 60% of your income if you donate cash). You may carry over the remaining deduction to offset future income if your charitable contribution is larger than these percentages. By concentrating, or lumping, charitable contributions and then itemizing every few years, individuals may benefit from both the increased standard deduction and the charitable deduction, therefore giving more to charity. If you feel uncomfortable giving a “larger-than-normal” amount of money to charity in one year, consider setting up a donor-advised escrow fund, which allows you to receive the tax deduction of the gift in a single year while retaining the option to spread the distributions to charities over an extended period. Note the following example:

Assume you wish to make a gift to your favorite charity of $5,000, while at the same time you are planning to dispose of the shares of a publicly traded company that you’ve held for several years. The shares, currently worth $5,000, were purchased several years ago for $1,000. The difference between the fair market value purchase price is an accrued capital gain of $4,000. Comparing the cost of the donation to you, assume first that you sell the shares and donate $5,000 in cash; and second that you donate the shares directly to the charity.

Under both scenarios, you will have a disposition of your shares for tax purposes at their fair market value of $5,000. Assuming your capital gains tax rate is 20% and your marginal tax rate is 35% (this is the tax you pay on any incremental income you have), you would have to pay the following tax:

Tax on capital gain if you sell shares then donate cash:

• Proceeds of Disposition $5,000
• Cost of Shares (1,000)
• Capital Gain $4,000
• Taxable Portion of Gain at 20% $800

Tax on Capital Gain if you donate shares directly:

• Proceeds of Disposition $5,000
• Cost of Shares (1,000)
• Capital Gain $4,000
• Taxable Portion of Gain at 20% $0

The difference in the amount of tax you must pay is directly the result of the difference in calculating the taxable portion of your gain!

Under both scenarios, you will still get a tax break based on the value of your donation. This tax break will be roughly 35% of $5,000 or $1,750. Therefore, your $5,000 donation will cost you the following:

Cost of donation to you if you sell shares then donate cash:

• Amount of Donation $5,000
• Add: Tax on Capital Gain $800
• Less: Decrease in Taxes Due To Donation ($1,750)
• Cost of Donation To You $4,050

Cost of donation to you if you donate shares directly:

• Amount of Donation $5,000
• Add: Tax on Capital Gain $0
• Less: Decrease in Taxes Due To Donation (1,750)
• Cost of Donation To You $3,250

**Certain tax restrictions may apply. You should consult your tax adviser to determine any deduction limitations.

In this example, by gifting your shares directly to your favorite charity rather than selling the shares you will have saved $800 in tax on your capital gains. Generally, if you are going to make a donation and also plan to sell securities, you should consider donating the securities to the charity instead to “supercharge” your generosity.

Your giving will have a positive impact on whichever charity you choose to help. Learning about your options and strategies can benefit both you and your donor(s).

 

Anne Marie E. Ashworth is a 2015 graduate of Virginia Tech with a BS in Business, where she majored in Finance with a financial planning concentration. Mrs. Ashworth joined Abacus in June of 2015 and earned the CFP® designation in May of 2017.

Abacus is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.7 billion on behalf of its 250 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.