Gifting Appreciated Stock
Key Takeaways
- When supporting your favorite causes, don’t automatically reach for the checkbook.
- Gifting stock, mutual funds, or exchange-traded funds to a charity can generate bigger tax savings for you—and the recipient. It’s also a great way to rebalance your portfolio.
- Income limits and other restrictions may apply. Always check with your tax advisor before pulling the trigger on a well-intended gift.
With cool autumn weather and earlier sunsets upon us, thoughts turn to year-end planning in our neck of the woods. With many of you seeing substantial appreciation in your concentrated stock holdings as we head into an uncertain tax landscape, you may wonder what to do with your gains. Many of you have asked if it still makes sense to gift to charity to help reduce your taxable gains. How you gift is just as important as how much you gift. When gifting to charity, most people simply write a check. This method is the easiest and most efficient way to gift—and it may be tax-deductible depending upon your tax situation.
However, since you may have a robust personal stock portfolio, a better way to gift to charity can be with appreciated stock that you’ve held for more than one year. Note - it is very important that you have held the stock for over a year to receive a deduction at fair market value.
Real-World Scenario
If you gift $10,000 in cash to a charity and you are in a 24% personal income tax bracket, you are eligible for a tax savings of $2,400 ($10,000 x 24% = $2,400). This scenario assumes you are itemizing your deductions on your personal income tax return and a tax deduction is available for your charitable gifting.
Now let’s assume you gift $10,000 of stock, mutual funds, or exchange-traded funds (ETFs) you have held for more than one year to a charity. If the cost basis of those assets is $2,000, the unrealized gain is $8,000. As with gifting cash, the $10,000 in stock you gifted is deductible and you receive the same tax savings on the contribution of $2,400 ($10,000 x 24%). However, you never pay tax on the $8,000 gain--and neither does the charity that received the gifted stock.
Even better, if you still like the stock, you could take the $10,000 in cash you were going to gift to the charity and repurchase the stock for $10,000. This strategy allows you to establish a new and higher basis going forward. Also, gifting appreciated stock allows you to reduce a concentrated stock position you may have or at least rebalance your account, while avoiding gain on the sale – all while funding your favorite charity!
The scenario above is especially relevant if you were planning to sell the stock and gift the proceeds to the charity. If the capital gain of $8,000 was taxed at the long-term capital gains rate of 15%, then you would pay $1,200 ($8,000 x 15%) in tax on the sale and reduce your overall tax savings to $1,200.
Note - the tax deduction and savings depend on your income and your ability to itemize deductions on your tax return. Also, before gifting stock, you need to confirm that your preferred charity can accept gifted appreciated securities.
Gifting Caveats
If gifting appreciated stock is something you want to consider, keep the following in mind:
- Always consult with your tax advisor before moving forward. Make sure gifting appreciated stock is appropriate for you and the tax benefits are as expected.
- The tax deduction for contributions of appreciated securities is limited by your income level. Again, make sure you consult with your tax advisor to ensure awareness of any giving limitations.
- The stock must have been held for more than one year to receive favorable tax benefits.
- Provide complete details of the transfer to your tax advisor since special reporting is required.
Consider the Benefits
You may have to jump through a few hoops to facilitate gifting appreciated stock. However, the tax savings can be substantial and you’re helping people in need. Feel free to contact us if you have any questions.
About the Author:
Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.