Provided by Whitlock Wealth Management
Like many investors, you may own shares of stock (or other assets like mutual funds) that have appreciated in value given the generally favorable environment for the markets in recent years. If the stock is held in a taxable account, it means that a decision to sell shares at some point in the future may result in a taxable gain.
One option to consider is gifting those appreciated shares to qualified charities. This may provide a tax benefit for you. And, it could result in a larger gift for the receiving organization as well.
Weighing your options
Donating stock rather than cash makes the most sense if it has been held in a taxable account for longer than a year and it has appreciated in value. It also may be best if you were already considering selling that stock position.
Consider a situation where an individual wants to take a stock valued at $2,000 and use it to fund a donation to a qualified charity. In this example, we’ll assume the stock was purchased 10 years ago for $1,000 and is now valued at $2,000. The donor can proceed in one of two ways:
The donor sells the stock, realizing a capital gain of $1,000. Assuming the gain is subject to the top long-term capital gains tax rate at the federal level (20%) the federal income tax on the gain is $200; and could be more when considering any state taxes. That leaves only the after-tax value of the proceeds from the stock sale (approximately $1,800) available to donate to the charity.
Instead of selling the stock, the individual arranges to donate the stock to a qualified charitable organization. In this way, no stock sale occurs while the individual owns it, avoiding the federal capital gains tax. Ownership of the full $2,000 value of the stock transfers to the charity. The organization can sell the stock at any time without any tax consequences given its tax-free status. The donor may be able to claim the full $2,000 value of the stock as a charitable contribution for tax purposes.
The advantages of donating stock
In this example, it is clear that there are several advantages to donating stock directly to the charity rather than liquidating the shares first and donating the proceeds in cash:
- A long-term capital gains tax liability is avoided by not having to sell the stock first.
- The net value available to donate to charity is larger by directly gifting stock rather than liquidating it first and donating the after-tax cash proceeds.
- The larger value of the donation means the available tax deduction for the gift is larger as well.
This creates a win-win situation, both for you as the donor as well as the charity. The organization can turn the stock received into cash immediately by selling it or choose to hold onto the stock to capitalize on potential future gains. That means the value of your gift could be enhanced.
This strategy works specifically for appreciated stock that is held for at least 12 months (qualifying for long-term capital gains treatment). If the stock was held for less than 12 months, tax laws only allow you to deduct the cost-basis value of the stock that was donated. If the stock lost value, it is more advantageous to sell the shares first and then make the donation to charity. You may be able to utilize the capital loss on your tax return to offset other gains or a portion of your income.
Check out your options
Before you decide to donate stock to charity, check with the organization in advance to make sure they are able to accept such a gift. Also be sure to consult with your tax advisor to have a clear understanding of the tax ramifications of your donation plan.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor and CEO with Whitlock Wealth Management, a private wealth advisory practice with Ameriprise Financial Services, LLC. He specializes in fee-based financial planning and asset management strategies and has been in practice for 26 years. To contact him visit whitlockwealth.com, call 877-WHITLOCK or email firstname.lastname@example.org. Offices are located at 12848 Harbor Dr, Ste 101, Lake Ridge, VA 22192 and in Downtown Historic Manassas at 9073 Center Street, Manassas VA 20110.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.
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