As we approach year-end many of our clients are looking for ways to save on their tax bill. One effective strategy, especially after the huge gains in the market this past year, is to donate appreciated stock. Donating appreciated stock has many advantages compared to simply giving cash. Not only will you be allowed to deduct the appreciated value of the stock, but you also eliminate capital gains on the donated stock, giving you a double benefit compared to giving cash. However, these transactions can take time. If you are interested in donating stock, then start the process now.
Let’s walk through an example to show the benefit of giving appreciated stock. Assume that you donate $10,000 worth of stock with a basis of $6,000. You could receive a tax deduction for $10,000 AND avoid paying tax on the $4,000 in gains that will be taxable if you sell the stock. If you still like your stock, you can use the cash that you would have donated to repurchase the shares, resetting your cost basis for tax purposes, and still saving the taxes. In fact, donating your winners, and selling your losers can be an excellent tax strategy, especially for those in the higher brackets.
Sometimes it can be difficult to quickly decide where to donate appreciated stock before year end. If you do not know where to give, or would like to give to multiple charities, then consider donating to a Donor Advised Fund or DAF. A DAF allows you to gift your appreciated stock into a fund this year, receive a current year deduction, and then send checks to the charities of your choice in later years.
Of course, there are limits on gifting appreciated stock, so it is best to talk with your advisor or CPA to make sure the strategy makes sense for you. The rules can be complicated but here are a few basics that you should know:
1) The security must be held for more than 12 months before donating.
2) You must donate the appreciated stock before you sell it. Once the stock is sold, the capital gains are realized on your tax return, so part of the benefit is lost.
3) The charity must be a qualified 501(c)(3) to qualify as a charitable deduction on your tax return. (A DAF does qualify as a 501(c)(3) charitable organization)
4) You can deduct appreciated capital gain assets (such as appreciated stock) up to 30% of your Adjusted Gross Income. This is lower than the cash charitable contribution limit, which is typically 60% of Adjusted Gross Income, but is temporarily increased to 100% of Adjusted Gross income for 2020 and 2021.
5) You must itemize deductions for the charitable contribution to matter. The standard deduction has been increased to 25,100 for married couples filing jointly for 2021, and $12,550 for singles. This means that your total itemized deductions must exceed these thresholds before the charitable deduction will reduce your taxes. You will still avoid the taxes you would have paid on selling the stock, but the charitable deduction may not help.
6) You will need to get a receipt and have clear documentation of the value of the stock that you donate. Not all charities are sophisticated enough to handle these types of transactions. If your charity does not know what to do with stock, consider gifting the stock to a Donor Advised Fund. You’ll still get the benefits of donating the stock, and the fund can send cash to your charity.
So, what is the bottom line? If you are writing checks to your church or favorite charity and you have appreciated stock, give us a call. The strategy could save you money on your taxes, allowing you to give more and make a bigger impact.