3 Reasons to Give Away Appreciated Stock
As the stock market continues to recover, perhaps you’ve seen significant gains in your portfolio, or maybe you invested in a stock that skyrocketed and now your portfolio is out of balance. If you have a heart for nonprofits, we have some good news: donating stock directly to charities, such as the Richland County Foundation, is one of the most tax-efficient ways to give. Here are three reasons why:
- You receive a double tax benefit
When you donate the stock directly to a charity, you receive a deduction off your income for the amount (fair market value) donated, the same way you would receive a deduction by making a cash donation. In addition, a donation of appreciated stock that has been held one year or more allows for avoiding capital gains tax. This could increase the size of your donation by up to 20%!
- You can potentially avoid future capital gains
You may have a favorite stock that you would like to hold for a very long time. Strong performance in that stock may increase your desire to hold the stock, but the higher the stock goes the larger your potential tax burden becomes. Consider donating a portion of the appreciated stock and then purchasing new shares with cash. This resets your cost basis and reduces your future capital gains.
- You keep your portfolio balanced
If one of your portfolio positions has increased more than the others, choosing to donate some of that security can help it from becoming a concentrated position that adds risk to your investments. Utilizing a donation plan can put your capital gains to work and keep your portfolio in check.
This chart shows the tax savings of donating $10,000 of an appreciated security that has been held for one year or more, $10,000 in cash, or selling an appreciated security then donating cash. This assumes the security was originally purchased for $2,000 and is now worth $10,000.
|Donate Appreciated Securities
|Sell Securities & Donate Cash
|Donate $10,000 Cash
|Income Tax Savings (35% tax rate)
|Capital Gains Tax Paid (15% tax rate on $8,000 gain)
|Net Tax Savings
Don’t have a particular non-profit in mind? Don’t worry you can still take advantage of this tax-saving strategy by donating your appreciated stock to a Donor Advised Fund at the Richland County Foundation. This will allow you to realize the tax savings and remain in control of how those funds are donated in the future.
There are some nuances to be aware of when considering this strategy. For example, if your donations along with other allowable deductions don’t put you over the standard deduction (for 2021: 12,550 for single filers; 25,100 for married filing jointly) this may not carry the same advantages. As in most financial decisions, this choice should be made while considering how it fits into your complete financial plan. Please contact your professional advisor to help you decide if this is right for you.
Tim Hilterman, CFP®, CAP® is a financial advisor with Whitcomb & Hess CPA’s and Financial Advisors. He earned the Chartered Advisor in Philanthropy® (CAP®) designation to empower people to think big, make a positive impact in the world and feel the joy of using their wealth, talents, and experience to improve the lives of those around them.