Charitable Donations – Why Choose Stock Over Cash?
The wise man does not lay up his own treasures. The more he gives to others, the more he has for his own. ~ Lao Tzu
It’s that time of year to think about charitable donations. Close to 30% of giving occurs in December of each year, according to Network for Good. Now is the time to execute your end-of-year charitable giving strategy. Charitable donations are a great way to benefit those in need and have the added benefit of a tax deduction. But what is the best way to give? Appreciated stock or cash?
Generally, it is much more beneficial to donate appreciated stock rather than cash. Why?
Manage Capital Gains
Charitable donations are typically deductible for those taxpayers who itemize deductions. With the 2018 tax law changes, the standard federal deduction has doubled, to $12,400 for individuals and $24,800 for married couples filing jointly, making the hurdle for itemization higher.
But, high-net-worth investors with appreciated stock portfolios should not have much difficulty reaching the higher hurdle. If itemized deductions for other purposes do not clear the standard deduction bar, simply make a sufficient charitable donation to clear the bar.
Highly appreciated stock in a portfolio may become a capital gains tax issue once the investor is ready to sell that position. The capital gains tax can be as high as 23.8% when the Medicare surtax applies.
A stock held for greater than a year that is donated to a qualified charitable organization removes the capital gains tax liability, and allows you to deduct the fair market value of the donation from your adjusted gross income (AGI) on schedule A of your federal income tax return. Choose shares with the lowest cost basis. Keep in mind, however, that the deduction for a donation of appreciated stock to qualified charities is limited to 30% of your AGI. Any amount over the 30% threshold would be a carryover for up to 5 years.
Donating stock can also increase the size of your gift. Since you avoid the payment of capital gains tax incurred when selling the shares, this portion can go directly to the charitable organization. In other words, by donating stock that has appreciated for more than 12 months, you are actually giving approximately 20% more than if you sold the stock and then made a cash donation because of the avoidance of capital gains taxes.
Another opportunity to donate and avoid capital gains would be to set up a donor-advised fund. It allows the investor to move appreciated stock into the fund without any tax penalty, then decide over time how to donate assets in the fund to deserving charitable organizations. When compared to setting up a private foundation, a donor-advised fund has no upfront costs, has no annual payout requirements, and is housed under a Community Foundation who handles most of the administration. This is a smart option for investors who are looking for efficient and knowledgeable grant making strategies, while receiving tax advantages.
Use Cash to Replenish Your Portfolio
If you want to maintain the shares in your portfolio, choose low basis shares to donate and buy back the same number of shares using cash. Then, you still have the same value in your portfolio, but you have essentially given yourself a “step-up” in basis, without having to recognize a gain. This sets up the investor to have a higher cost basis than the gifted shares. Over time, this higher-basis investment increases the potential for eventual tax-loss harvesting, which should help reduce future tax payments.
Charitably-minded investors should consider donating stock. Donating stock means you may end up donating a higher dollar amount to a deserving charity and manage your capital gains tax in the process. However, please consult your advisor to determine the best option for you when considering donating appreciated stock or cash.
Most importantly, your donation remains a powerful way to help the charitable organizations of your choosing.