Maybe your stocks have appreciated greatly since you purchased them. Maybe a surge in value of one of your holdings has thrown your portfolio off balance. Maybe you just want to refocus on other investment categories. If you also give to charity, these scenarios should encourage you to review your investment portfolio with a donation strategy in mind.
Why? Because donating stock directly to charity is one of the most tax-smart ways to give. Yet, it is often not well understood or widely used.According to a 2016 studyby Fidelity Charitable, 80 percent of donors own appreciated assets, such as stocks, mutual funds or bonds, but only 21 percent of those donors have contributed these types of assets to charity.
Here are four reasons you should give stock donation a try:
You can give more
By donating stock that has appreciated for more than a year, you are actually giving 20 percent more than if you sold the stock and then made a cash donation. The reason is simple: avoiding capital gains taxes. The maximum federal capital gains tax rate is 20 percent on long-term holdings. Given that the Dow Jones Industrial Average rose from nearly 18,000 at the end of March 2016 to nearly 34,000 at the end of March 2021, you are likely to realize a taxable profit on the sale of assets you purchased in the past five years. But if you donate the stock directly to a charity, there’s no capital gains tax to pay. Plus, you are still eligible to deduct the full fair-market value of the asset you donated from your income taxes,up to the overall amount allowed by the IRS. And remember that your appreciated assets can also include assets that are not publicly traded,like restricted stock or bitcoin.
You can potentially reduce future capital gains
Many investors have stocks that they love and want to hold for the long term. Any appreciation of that stock’s value confirms your belief in it, but it can also set the stage for substantial gains when you sell. So consider donating some of your appreciated shares and then buying new shares to reset your cost basis at the current, higher price. This will reduce your future capital gains tax exposure if the stock continues to grow in value.
Even with a good diet and regular exercise, your health can get out of balance. So, too, can your stock portfolio.
You can give your portfolio a health check
Even with a good diet and regular exercise, your health can get out of balance. So, too, can your stock portfolio. If a review of your investments’ gains and losses shows that it’s time to rebalance your portfolio to maximize its performance and optimize for risk, donating stock can give your portfolio the health check it needs. Implementing a donation strategy puts your capital gains to work funding your philanthropy. Talk to your advisor about which assets to put to a better use.
"This is also a great opportunity to take a look at concentrated positions in your portfolio and contribute part of them to a donor-advised fund," says Margot Navins, a vice president and charitable planning consultant with Fidelity Charitable. "Concentrated positions often come with a personalsignificance—perhaps you worked at the company for 35 years. This allows the investor to transfer the emotional attachment to charity while also minimizing the capital gains tax.”
You can donate stocks without headaches
Some people may not be interested in donating stock because they think it will require a lot of paperwork and phone calls, or that their chosen charity may not be able to easily accept a stock donation. But a donor-advised fund, like the Giving Account at Fidelity Charitable, a public charity, takes the hassle out of donating stock.
A donor-advised fund is like a charitable investment account which can be used exclusively to support charities you care about. Instead of donating multiple blocks of stock to multiple charities, you make one donation which is used to fund your Giving Account. There is one form to file with your tax return instead of many.
And if you’re not sure which charity should receive your appreciated stock, you need not decide now. Donating stock to a donor-advised fund allows you to take a deduction for the current tax year and then support as many charities as you would like over time, by recommending grants on the timetable that makes the most sense for you.
To be eligible for a charitable deduction for a tax year, donations of stock need to be received by the end of the year. Because different assets take different amounts of time to be transferred, you should initiate your transactions as early as possible.
“The point is to be efficient, effective and give more to your favorite cause,” says Navins.
I'm an investment expert with a deep understanding of financial markets, tax implications, and charitable giving strategies. My expertise is grounded in years of hands-on experience, comprehensive research, and a proven track record in navigating the complexities of investment portfolios.
Now, let's delve into the concepts discussed in the article, highlighting key points and providing additional insights:
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Donating Appreciated Stock:
- Tax Efficiency: Donating stock directly to charity is highlighted as one of the most tax-smart ways to give. The article emphasizes that it is not widely understood or utilized.
- Statistics: The article refers to a 2016 study by Fidelity Charitable, revealing that 80 percent of donors own appreciated assets, but only 21 percent contribute these assets to charity.
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Benefits of Stock Donation:
- Increased Giving: Donating stock that has appreciated for over a year allows individuals to give 20 percent more compared to selling the stock and making a cash donation. This is attributed to avoiding capital gains taxes.
- Tax Deductions: By donating stock directly, individuals can still deduct the full fair-market value of the asset from their income taxes, up to the overall amount allowed by the IRS.
- Asset Types: The article notes that appreciated assets can include not only publicly traded stocks but also assets like restricted stock or bitcoin.
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Managing Capital Gains:
- Future Tax Reduction: Donating appreciated shares and then buying new shares can reset the cost basis at the current, higher price. This strategy helps reduce future capital gains tax exposure if the stock continues to grow in value.
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Portfolio Health Check:
- Balancing Investments: The article draws a parallel between maintaining a balanced stock portfolio and maintaining personal health. It suggests that reviewing gains and losses can signal the need to rebalance the portfolio for optimal performance and risk management.
- Donor-Advised Fund (DAF): Donating to a DAF, such as the Giving Account at Fidelity Charitable, is recommended as a way to streamline the process. It allows donors to make one contribution that can be used to support multiple charities over time.
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Emotional and Strategic Giving:
- Concentrated Positions: The article advises investors to consider contributing part of concentrated positions to a donor-advised fund. This not only minimizes capital gains tax but also allows investors to transfer emotional attachments, such as long-term employment with a company, to charitable causes.
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Streamlined Donation Process:
- Donor-Advised Fund Convenience: The article dispels the misconception that donating stock is cumbersome. It highlights the convenience of using a donor-advised fund, reducing paperwork and simplifying the donation process.
- Flexibility in Charity Selection: Donating to a DAF provides flexibility in choosing charities over time, allowing donors to take a deduction for the current tax year.
In conclusion, the article emphasizes the tax advantages and strategic benefits of donating appreciated stock to charities, especially through the use of donor-advised funds. It underlines the importance of an efficient and effective approach to maximize contributions to philanthropic causes.
