If you intend to make a donation to a qualified charitable organization this year, we recommend that you have us review your portfolio first. It may be that writing a check or giving cash will not be in the best interest of you or the charitable organization.
Given the broad market increases over the past several months, many of our clients own shares of securities (these can include individual stocks, exchange traded funds, mutual funds and even individual bonds, etc.) in taxable accounts (non-IRA’s) that have substantial unrealized gains. This creates an opportunity to increase the power of your charitable donations. Maximizing the tax benefits will allow you to make more of a difference to the causes you support.
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:
- Since 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 up on the tax benefits: avoiding tax on the unrealized capital gains of the donated securities AND receiving a charitable itemized deduction.
Information herein should not be considered legal advice or tax advice. We recommend you consult a tax professional before donating appreciated securities strictly based on this article.
Here is a hypothetical example:
Assume you own stock XYZ purchased over one year ago for $20,000 and today it is worth $30,000. You have an unrealized gain of $10,000. You plan to donate the entire $30,000 to a charitable organization.
If you sold the $30,000 stock prior to donating it, you would pay capital gains tax on the $10,000 increase in value. The federal tax rate for long-term capital gains is between 15% and 23.8% (depending on your filing status, income, etc.). For this example we will assume 15%. Therefore, your tax savings for donating rather than selling the stock would be $1,500 ($10,000 x 15%). If the donated stock is a security we recommend you still own, we would simply re-purchase those shares with cash … the cash you were going to use to make your donation in the first place.
In addition, you can claim a charitable itemized deduction of the full fair market value of the donated shares ($30,000). If you are in the 28% federal tax bracket, this would generate another $8,400 ($30,000 x 28%) in tax savings. This brings your total federal tax savings to $9,900. If you are in a higher tax bracket, your 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 tax benefits from making a donation of appreciated securities versus giving cash can be substantial. Moreover, virtually every charitable organization is just as happy to receive donated securities versus cash. 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.