By Steve Kohler, CFP®
Two areas we focus on in our Financial Planning process, tax advising and charitable giving, tend to come together at this time of year. One way you can boost your charitable giving while saving on taxes is by giving stock from your personal investment account that has appreciated in value.
You can usually deduct the full fair market value of appreciated long-term assets you've held for more than one year, such as stocks, bonds or mutual funds.
For example, if you have an investment that you purchased for $5,000 and now it is worth $10,000, you can give that appreciated asset to a charity. You still receive a $10,000 tax deduction, but you avoid paying tax on the $5,000 capital gains. When the charity sells the stock they are exempt from paying the capital gains tax. With capital gains taxes currently at 15%, you save $750.
You also have a couple of options to donate your appreciated stock. You can donate directly to the charity or to a donor advised fund (DAF). In addition, there is some good news concerning deductions. The number and amount of itemized deductions have been lowered and the standard deduction increased. And if you’re sitting on highly appreciated securities, such a donation can be an even more effective and tax-efficient way to support your favorite charity.
This is far more favorable to you than selling securities to generate the cash you need for a donation. Writing a check to a charity is in essence simply trading dollar for dollar.
Contributing the securities directly to a charity increases the amount of your gift as well as your deduction.
One rule to remember here is that the deduction is limited to 30% of your adjusted gross income (AGI) in the year of the donation, with a 5-year carry-forward for unused deductions.
This differs from a 60% limit for donations of cash, but you can still carry forward unused deductions for five years. If you’re planning a large contribution that’s close to or exceeds these AGI limits, first talk with a tax professional.
While it is possible to gift those appreciated shares directly to your charity, placing them within a donor advised fund (DAF) could be more beneficial in many circumstances.
For instance, some charitable organizations may not have the capability or understanding on how to accept a gift of stock or how to liquidate it. Using a donor advised fund gives you a tool whereby your appreciated stock can be gifted into the fund and held in that format.
The gift of appreciated stock can reduce the “gift cost” by as much as 24% when compared to giving cash. Also, any continued growth of those appreciated shares within the DAF will be tax-free.
Appreciated stock is a powerful tool for charitable giving that is often overlooked. It can be a smart year-end strategy for charitable giving and an important part of an overall successful Financial Planning process.
Steve Kohler is Managing Director of LifePlan 20/20® Financial Planning Services at
DBR & Co. Wealth Partners, a Pittsburgh-based wealth management firm. If you would like to contact the author, Steve Kohler, please e-mail him at firstname.lastname@example.org or call 412-227-2800.
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