As we approach year end and the holiday season, you may be thinking about giving back. According to the Network for Good, 29% of all giving done on their platform in 2016 occurred in December, with 11% taking place over the final three days of the year. Properly planning your charitable contributions can help lead to a more profound positive impact on the cause of your choice while helping to alleviate the tax impact on yourself. Now is the time to plan out and begin to execute your charitable giving strategy.
Donating stock can be a very impactful way of making your charitable contributions. Consider these four reasons when deciding to donate stock vs. cash to your favorite charity or cause.
Like cash, donations of stock are tax deductible
Charitable donations may be deductible for those taxpayers that itemize their deductions. With the recent tax law changes and increased standard deduction, this hurdle is now higher. However, those with the means to do so can help themselves and the causes they choose to support by donating stock to charities. Donations of appreciated stock are limited to 30% of their adjusted gross income (AGI).
Remove a tax liability from your portfolio
Donating highly appreciated stock to charity removes the entire tax liability, from the appreciation in the stock, from your portfolio. Federal capital gains taxes can be as high as 20%. Certain states also impose capital gains tax at the state level. If you factor in the 3.8% Medicare tax on investment income, you could be on the hook for a 23.8% federal capital gains tax plus a state capital gains tax on the proceeds from the sale of your stock should you choose to sell it and donate the cash proceeds.
You may be able to find a better use for your cash
You can donate stock from your portfolio and then deposit cash into the portfolio in an equal amount to the value of the gifted securities. If you want to continue to hold the stock you donated, you can purchase it at a higher cost basis, lowering your potential tax liability down the road. You could also purchase a different investment to help maintain your desired asset allocation.
Donating stock can increase the size of your gift
Many investors sell stock to raise the cash they wish to donate to charity. By selling stock, you could potentially incur a tax liability. When you donate stock straight to a charity, you get the added benefit of receiving a tax deduction for the stocks full fair market value. This can result in donating a larger size gift to the charity given you do not have to pay capital gains tax.
Donating cash to charities can be a natural instinct for many because the cash gift can decrease one’s taxable income by the gifted amount, reducing their tax liability. However, donating stock can make it possible to donate a higher dollar amount to your charity and increase your charitable deduction in the process. Cash donations are fantastic, but it makes sense to explore whether donating stock may be a better option for you.
As always, if you have any questions specific to your situation, please do not hesitate to contact us.
*This article is provided for informational purposes only and should not be interpreted as investment advice.
Sources: Parametric, CNBC