Your Best Year-End Tax Planning Move: Donate Stocks Instead of Cash
Boost your philanthropy and tax savings in one fell swoop.
For high-income earners, there is no year-end tax planning move more valuable than donating appreciated shares of stock or a fund. With the stock market continuing its ascent to new highs, philanthropic-minded investors have a great opportunity to put the tax code to work for them to boost both their charitable donations and their tax savings. If you are planning to make a year-end donation to a qualified charitable organization, you should consider the advantages of donating appreciated shares rather than a cash gift.
Charitable Contributions and the Tax Code
Integral to charitable contributions are the tax deductions allowed under the Internal Revenue Code (IRC). Contributions are an itemized deduction reported on Schedule A of your federal tax return. In any given year, you are allowed to deduct contributions worth up to 50% of your adjusted gross income (AGI). In certain cases, 20% and 30% limits apply. If you exceed the limit, your excess contributions can be carried over for up to five subsequent tax years.
Using Donated Shares to Boost Contributions and Tax Savings
When donating appreciated shares that you've held for more than one year, you not only benefit from the tax deduction for the charitable contribution; you also avoid the unrealized gains on the appreciated shares. For assets donated to a charity, the deduction is equal to the fair market value of the donated assets. That means you are able to deduct the full value of the asset even though it exceeds your cost basis. It also means you won't be taxed on the unrealized capital gain of the asset.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For example, if you would normally donate $10,000 to a charitable organization, you could instead donate $10,000 worth of shares. If your cost basis for the shares is $6,000, your unrealized gain would be $4,000. The charity receives the full value of the shares, and you receive a tax deduction for their full value. The unrealized capital gain is "forgiven."
If, instead, you sold the shares for $10,000 and donated the cash, you would owe capital gains taxes on the $4,000 gain in value. At the higher capital gains tax rate of 23.8%, you would owe $952. As a result of selling the shares to make the donation, it would actually cost you $10,952.
In either case, you would be able to deduct $10,000 as a charitable contribution. If you are in the 39.6% federal income tax bracket, you would realize $3,960 in tax savings. However, by donating the appreciated shares, you would realize an additional tax savings of $952 for a total tax benefit off $4,912 on donated assets that cost you just $6,000!
Not All Shares Are Treated Equally
It is important to keep in mind that this strategy does not work for shares you've held for less than a year. Shares held for a year or less are considered ordinary income property, which would limit your charitable deduction to the cost basis of the shares.
It also doesn't work as well with shares that have lost value. In that case, you would be better off selling the shares and donating the proceeds to the charity. You can still deduct the full contribution and you take a capital loss deduction.
The Donor-Advised Fund Alternative
As an alternative, you could transfer the shares to a donor-advised fund. That will give you the same tax benefits, but it will allow you more time to decide which charity will receive the donation. The donor-advised fund will sell the shares and give the cash to a qualified charitable organization of your choice. You can establish a donor-advised fund at a brokerage firm or community foundation with a $5,000 to $10,000 share transfer.
As a year-end tax-planning move, donating appreciated shares is an easy way to generate big tax savings, but it does require taking action before December 31. Some brokerage firms only require paperwork and are able to complete the process in two to four business days, while other firms take longer and require a letter of authorization to transfer the shares. Mutual fund companies typically have their own forms, which can sometimes take up to three weeks to process. If you're unable to transfer shares prior to the end of 2016, keep it in mind as a tax-planning tool for 2017.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
Craig Slayen, a new partner with Cypress Partners, contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published