Donating Appreciated Securities Instead of Cash

by | Dec 11, 2021

Since the TCJA of 2017 and the increased standard deduction amount, less U.S. taxpayers have been able to itemized. But, the increase in deductions isn’t the only tax benefit from charitable giving. Donating appreciated shares of securities can offer worthwhile benefits as well.

Giving to charity is a noble act and is great way to support a worthy cause. From my conversations with those that are charitably inclined, I have found that most do not give solely for a tax benefit. However, for those that are charitably inclined, there are opportunities to take advantage of some unique ways to give that may provide additional tax incentives above and beyond just an itemized deduction.

 

Why is this important?

With the release of the Tax Cuts and Jobs Act of 2017, the standard deduction rose for both individuals and married couples, each by almost 100%. In 2022, the standard deduction is $12,950 for an individual and $25,900 for a married couple. This means that with a higher standard deduction, less people will likely itemize because their itemized deductions will not exceed those marks, even when including their charitable giving. And, because many people don’t give to charity primarily for tax reasons and will presumably continue to give, many charitable gifts in 2022 and beyond will essentially go unrewarded from a tax standpoint.

In the aftermath of the TCJA of 2017, strategies like using Donor Advised Funds (DAFs) and taking Qualified Charitable Distributions (QCDs) have increased in popularity. However, there is another method of charitable giving that could even be simpler for the donor; donating appreciated securities, not cash.

 

How Does It Work?

Donating appreciated assets like property or securities could benefit the donor by protecting the donor from having to pay capital gains tax that may be imbedded in the assets they own. Shares of stock, for example, with unrealized capital gains can be gifted with no capital gains tax assessed to the donor at the time of the donation. And, the charity can then sell the asset upon receipt at no tax to them.

For example, let’s assume you have a taxable brokerage account worth $200,000 with unrealized capital gains of $100,000. Instead of continuing to give to charity from your regular income sources and cash flow, you can gift your securities directly to the charity of your choice.

If you typically gift $20,000 per year, then you could essentially save yourself $100,000 in capital gains over a 10-year period by gifting your securities directly. Capital gains taxes are typically assessed at a rate of 15% – 20%, based on the taxpayer’s AGI (Adjusted Gross Income).1 Therefore, gifting appreciated assets in this example could save upwards of $15,000 – $20,000 in capital gains taxes.

And again, if the charity decides to sell your stock or mutual fund upon receipt, there are no tax consequences for them.

 

What About My Account

The next question donors usually have is, what about my investment account? If donations are coming out of the investment account, there is a concern that the account will become depleted to nothing. The answer is simple. If charitable gifts were previously made from income sources like your Social Security benefit or a pension, you can simply replenish your investment account in the amount of your gift from those same sources.

This will not only maintain the value of your investment account, but it will raise your cost basis in whatever securities you purchase, essentially lowering any capital gains taxes you’ll be responsible for in the future.

 

Double-Whammy Tax Savings

As previously mentioned, one strategy that has gained popularity in response to the TCJA of 2017 is the use of Donor-Advised Funds. This is where donors bunch their charitable giving into one year by taking a lump sum amount and donating to a Donor-Advised Fund, where they can essentially direct gifts from in the future. However, the tax deduction occurs in the year when the initial lump sum is deposited into the Donor-Advised Fund.

For this strategy to produce optimal results, some clients will often lump large amounts into a Donor-Advised Fund in one year vs. gifting to their preferred charities over time. For example, they might move $200,000 into a Donor-Advised Fund to account for 10 years of charitable giving (assuming gifts of $20,000/year). Again, the donor then can disperse gifts as desired over whatever time frame they choose, to whom they choose, as long as it is a charitable organization, but they will receive the entire itemized deduction in the year of the contribution to the Donor-Advised Fund.

Of course, this begs the question, can appreciated securities with large unrealized capital gains be gifted as part of a Donor-Advised Fund strategy? The answer is yes. The donor would not only save on capital gains tax by gifting securities instead of cash but would also benefit from the bunching of donations into one tax year with a Donor-Advised Fund. Pretty cool, huh?

 

Bottom Line

Giving back to good, charitable organizations is very important. In fact, I would venture to say we can all do more of it. However, we can also be smart about how we give. Donating appreciated assets to charitable organizations is a smart way to potentially reduce your tax liability. And, most charities are setup that they are prepared and able to receive such gifts.

Be sure you consult with a professional before you make any tax-planning or investment-related decisions. A CERTIFIED FINANCIAL PLANNER™ professional may be able to help you determine if you have an opportunity to take advantage of this charitable giving method.

 

1Taxpayers who fall under a certain income threshold may potentially pay 0% tax on capital gains. Income thresholds can vary from year to year. Refer to www.irs.gov for details.

 

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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