If you intend to make a donation to a qualified charitable organization, we recommend you first have us review your portfolio. It may be that writing a check or giving cash is not the best choice for you or the charitable organization.
Often our clients own shares of securities (usually individual stocks) in taxable accounts (non-IRAs) that have substantially increased in value. This creates an opportunity to increase the power of your charitable donations. Through direct donations of securities, you can both enhance the amount you are able to give and reduce your tax burden.
A charitable donation of long-term appreciated securities (securities held for longer than one year) is one of the most tax-efficient ways to give. There are two key benefits:
- Because the securities are donated “in-kind” (you donate the actual shares of the securities) rather than sold, capital gains taxes from selling the securities do not apply.
- You can deduct the full fair market value of the securities donated (determined on the date of donation) . . . up to 30% of your adjusted gross income.
If the rules are followed properly, you can essentially “double down” on the tax benefits: avoid tax on the unrealized capital gains of the donated securities and receive a charitable itemized deduction. Moreover, virtually every charitable organization is just as happy to receive donated securities (which they can immediately sell without capital gains tax) instead of cash.
Here is a hypothetical example. (Information herein should not be considered tax or legal advice. We recommend that you consult a tax professional before donating appreciated securities strictly based on this article.):
Anthony gives his annual bonus to his favorite charity every year. This year, his cash bonus is $30,000.
However, Anthony also owns stock XYZ that he purchased over one year ago for $10,000, and today it is worth $30,000. He has a gain of $20,000. That gain, if realized today, would be federally taxable. The tax rate for long-term capital gains varies depending on filing status, income, etc. For this example, we will assume Anthony pays a 15% capital gains rate. If he were to sell his ownership in XYZ, he would owe $3,000 ($20,000 x 15%) on the gain. By donating his XYZ shares to his favorite charity, Anthony is able to avoid the $3,000 capital gains tax. He can repurchase his position in XYZ with his $30,000 bonus . . . increasing his cost basis in the security to $30,000.
In addition, Anthony can still claim a charitable itemized deduction of the full fair-market value of the donated shares ($30,000). Assuming he is in the 28% federal tax bracket, this would generate an additional $8,400 ($30,000 x 28%) in tax savings. This brings his total federal tax savings to $11,400. If he were in a higher tax bracket, his tax savings will be even more.
It is important to note that claiming a charitable itemized deduction is not contingent upon donating appreciated securities. You can receive the same tax benefit by giving cash . . . up to 50% of your adjusted gross income.
As you can see, the incremental tax benefit from making a donation of appreciated securities versus giving cash can be substantial ($3,000 in this example). This is truly a win-win for donors and charities alike, and one that is often overlooked.
While we at Boyer & Corporon Wealth Management are not tax professionals, we are always available to work with you and your tax professional to implement strategies such as this.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.