Financial Planning

Charitable Giving: Donating Appreciated Securities for Charity

This story was printed in the Fall 2016 issue of The Emerald magazine.  If you do not receive printed issues of the magazine, but would like to, then please opt-in at sigmapi.org/updateinfo.

Tax deductions are a major benefit of charitable giving. Before cashing out of a profitable investment, consider making efficient use of its full value by donating it directly to a charity. Charitable giving provides donors with tax relief every tax season in the form of deductions. In an effort to encourage positive social action, the IRS provides incentives for all kinds of charitable contributions, including appreciated securities (stocks, bonds, mutual funds, etc. that have risen in value) to the charity of your choice. Long-term appreciated securities are the most common non-cash donations and they can be the best way for donors to give more to their chosen charities. The tax advantages to donating stocks are such that both the donor and the charity benefit.

What are the benefits?

Donating appreciated securities yields two tax benefits for the donor. The first tax benefit is the elimination of capital gains tax. Normally when you sell an appreciated stock, you pay capital gains tax on the amount your securities have increased in value since being purchased. For example, if you bought stocks for a total of $1,000 and then sold them years later for $5,000, you would owe capital gains tax on $4,000 of income from the sale. This tax can add up significantly depending on what tax bracket you fall under, how many stocks you sell, and how much they’ve appreciated over time. When you donate appreciated securities, however, you don’t owe any capital gains tax, no matter how much they’ve increased in value. The charity receiving your donation is free from capital gains tax on your contribution as well.

Tax Deductions

The second tax benefit is writing off the donation on your tax return. As long as you itemize, you can deduct charitable contributions on your return and the more you donate, the more you can deduct. In this case, you’ll be donating more since you can donate the entire value of the asset, not the value minus taxes. Thus, your tax write-off will be greater. In other words, you can take a charitable deduction on money that hasn’t been taxed. This also benefits the charity because they’ll get a larger donation than they’d otherwise receive.

There is a limit to how much you can deduct for charitable contributions, which varies depending on what you’re giving and to what organization you’re donating. Most organizations are subject to a 50 percent limit, meaning your charitable tax deduction cannot exceed 50 percent of your adjusted gross income. Other organizations have a 30 percent limit. You can check with the IRS or ask the organization themselves to be sure. These limits apply to monetary charitable donations. If you’re donating appreciated securities, the limits change; a 50 percent organization’s limit becomes 30 percent for appreciated securities, and a 30 percent organization’s limit moves to 20 percent.

Reducing Risk

Another benefit to donating your appreciated securities is reducing risk in your portfolio. If too much of your portfolio is dedicated to a certain kind of investment, your risk increases because your portfolio is less diversified, so your assets are all relying on that one kind of investment to succeed. To decrease that risk, you’d normally have to sell the stocks and pay capital gains taxes. Donating them, on the other hand, is a tax-free way to rebalance your portfolio.

The Details

To make this type of donation, it’s important to examine the details and learn the nuances that apply to these particular tax benefits:

In order for a security to apply, you must have owned it for at least one year prior to donating. If not, your charitable deduction would be limited to the security’s original cost.

If your stock is worth less now than when you bought it, donating it directly to charity won’t help you or the charity—you’d be better off selling it first, deducting the loss and gifting your charity with a cash donation.

Not all charities can and will accept stock donations, especially small ones. Make sure your chosen charity can accept your donation ahead of time.

If you have applicable stocks, bonds, or mutual fund shares and want to maximize your tax benefits, donating them to a charitable organization is one of the best things you can do. You’ll save money in taxes, the charity will receive more in donations, and it’s all completely legal. The IRS creates these incentives to encourage charitable contributions, so consider taking advantage by including appreciated securities in your charitable giving strategy.

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