Donating appreciated equity can be a gift for both you and your favorite charity.
For many of us, the end-of-year holidays are a time to connect with loved ones, make family memories and give back to the charities that mean the most to us. It’s often an appropriate time to get your portfolio in shape and diversify where necessary as well.
Consider this: donating long-term appreciated securities has the potential to help you realign your portfolio and give back tax-efficiently to the causes you care about. When done right, your donation may have an even greater impact for the causes you care most about.
A gift for them, a (tax) break for you
Donating appreciated stock offers several benefits – chief among them, the ability to make a larger value donation than giving cash after liquidating. You can avoid capital gains tax on the appreciated amount that you would have incurred had you sold the stock, and you get a tax deduction for the full fair market value of your long-term capital gain asset – up to 30% of your adjusted gross income. Plus, as mentioned earlier, it’s a way to reduce a concentrated equity position and help bring your portfolio back in line with your goals.
Here are five benefits of donating appreciated stock:
- The tax deduction for the market value of the donation
- Federal capital gains taxes savings in the amount you otherwise would have incurred from selling the stock outright
- An opportunity to rebalance your portfolio in line with your financial plan
- As an alternative to gifting cash, you can donate stock and then repurchase identical shares, often resulting in a step up in cost basis
- The ability to benefit a charity by the full appreciated amount of the stock
Gifting stock to a donor advised fund (DAF)
Donating to a charitable DAF tacks on another great benefit: the potential to grow your donation, tax-free. Donors use the fund as a financial planning tool to enhance their charitable giving. According to your recommendations, the fund – a charity in and of itself – then distributes the contributions to approved 501(c)(3) organizations over time. Additional benefits of DAFs include the ability to contribute to the fund (and claim the accompanying tax deduction) when it works best for you and your financial plan, as well as providing an easy and cost-efficient way to get multiple generations involved in your family’s philanthropic endeavors.
A bunching strategy can also work particularly well with DAFs. If you’re charitably inclined but won’t have sufficient itemized deductions to exceed the increased standard deduction, you may wish to bunch deductions by making a large charitable gift during a single year, equal to the total donations you would have made over several years. This can help you take advantage of itemizing in the year of your large donation, while taking the standard deduction in future years.
There are several factors to take into account when deciding how best to share your wealth. Your financial advisor can walk through the many options with you to find the best path for you, your family and your financial plan.
Sources: forbes.com; wsj.com; jasandiego.org; investopedia.com
Diversification does not guarantee a profit nor protect against loss. The process of rebalancing may result in tax consequences. This material is not intended as tax advice. Please consult your tax advisor for further information. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a donor advised fund for federal and state tax purposes. To learn more about the potential risks and benefits of donor advised funds, please contact Raymond James.
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