These are uncertain times both globally and nationally. The Coronavirus crisis and Black Lives Matter movement have both made constant headlines, and while there are crises such as these, the stock market has rallied back. The S&P 500 has recovered an incredible 42% since its lowest point in March, leaving it only 2% behind where it was last year.
As we move through this crisis, many readers are likely donating to charities to support their communities. Charitable contributions can also be an important part of your overall tax strategy, allowing you to take additional deductions each year. It’s important to make the most of your money, and get the largest tax savings possible based on your charitable giving.
If you own appreciated stock, you are in a strong position optimize your tax portfolio. In fact, this greatly benefits both the donor and the charitable organization. Over $21 billion in stock is given every year. The CARES Act has changed the way some charitable contributions are deducted. For example, donors who don’t itemize are now able to deduct up to $300, and that amount goes to $600 if you file jointly.
For donors, the primary incentive to donate stock is its tax-efficiency. When you donate appreciated stock that you have held for a year or more, you are able to get double the tax benefits. You bypass capital gains tax, which can take up to 37% of your capital gains, and deduct the full fair market value of the stock from that year’s taxes.
For example, consider an investor who purchased 29 Apple shares for $5,000 in February 2018. The shares hold a value of over $10,000 by June 2020. This investor is considering selling this stock and then donating the money to an organization for his end-of-year gift.
In this case, he would have to pay capital gains tax up to 37% of the value of his stock’s gain, which is $5,000. In this case, he would pay $1,850 in capital gains tax. He would then donate just $8,150 to the organization, which is only a write off of $8,150 on his taxes.
Instead, if he donates the full $10,000 worth of stock directly to the organization, no one has to pay taxes on sale. If he has held the stock for over a year, he is able to deduct the full $10,000 fair market value from his taxes. The organization receives the full $10,000.
This stock donation benefits both the donor and the charitable organization. Many local community centers see a big impact from a $1,850 difference.
Many investors are happy with their investment positions and allocation in their portfolio. That’s great! Still, donating stock can present an excellent opportunity to check your portfolio’s balance. By donating stock and then buying new shares on the open market, you void your capital gains tax, and reset your cost basis at the higher value of your appreciated stock. Any future losses or gains are thus calculated from the higher cost basis, which saves you on your future taxes.
Another idea is to tax loss harvest when there are corrections and losses in your portfolio, and later donate appreciated stock tax lots. Tax loss harvesting offsets existing capital gains in your portfolio, and donating appreciated stock further helps you avoid paying capital gains tax.
It’s best to donate appreciated stock that you have held for a year or more. If you have held the stock for less than a year, you will have to deduct the fair market value minus the appreciation of the stock.
When To Consider Donating Stock
You don’t need to wait for the perfect moment in your portfolio or the market to donate stock. A few times to consider donating stock are:
- When you are rebalancing your portfolio in response to portfolio drift from target allocations.
- Year end giving for the holidays and to increase your write-offs. Note: Make sure to donate the week before Christmas to make sure your donation clear by year end.
- Any time you intend to make a charitable contribution, and hold appreciated stock.
How To Donate Stock
There are services such as Cocatalyst that streamline the process of making appreciated stock donations. All you have to do is fill out their form and complete the signature, and they take care of the rest of the process. Charitable organizations can set up profiles with Cocatalyst to put all of their stock donations in one place.
Make sure to track the information you’ll need to deduct this donation properly from your taxes. You can read more about how to deduct stock donations from your taxes on the Cocatalyst website.
If you would like to handle your stock donation manually, you will need to work directly with the charitable organization and with your brokerage firm. This generally involves multiple faxing of paper forms and daily follow ups with the charity. Make sure you reach out to your broker directly to let them know that you do not want to sell the stock, but rather to transfer it in kind to the charity. If you sell the stock, even with the intention of donating it, you will have to pay capital gains tax.
Donating appreciated stock is an excellent way to increase your tax deduction while improving your community. You don’t have to wait until the end of the year; begin the process today. Your future self will thank you for it!