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Looking to Make a Charitable Contribution? Check Your Portfolio First

Insights & Ideas Team •  December 2, 2015 | Your Finances

“Buy low and sell high.” No doubt you’ve heard this advice when managing your portfolio. But what about, “Buy low and give high?”

When it comes to making charitable contributions, donating appreciated securities such as stocks, bonds or mutual funds can enhance the tax-saving power of your generosity. That’s because the IRS allows you to take a charitable tax deduction based on the fair market value of securities that have increased in value, assuming you’ve held them for more than a year. And neither you nor the charity will have to pay capital gains taxes when the securities are sold.

To understand the benefits, consider the following example.

Let’s say you wanted to make a gift to your college alma mater this year. You decide to sell $10,000 worth of stock and donate the proceeds to your school.  

Your stock shares, which you purchased 10 years ago for $2,000, have appreciated significantly, resulting in an $8,000 capital gain ($10,000 - $2,000). This will be subject to $1,200 in capital gains tax, assuming a 15 percent long-term capital gains tax rate—leaving you with $8,800 to donate to your alma mater. Come tax time, you’ll be able to deduct your $8,800 gift from your federal tax return, saving you $2,200 in income taxes, assuming a 25 percent tax bracket.

The total gift to your alma mater: $8,800. The net cost of the gift: $7,800 ($10,000 less the $2,200 current income tax deduction you’ll receive by donating cash).

A More Effective Strategy

Now let’s say you decided to donate your appreciated stock directly to your charity. Because you’re not selling the shares, there are no capital gains taxes to pay. That means you can deduct the full $10,000 contribution from your federal tax return. That would save you $2,500 in taxes ($10,000 x 25 percent).

The total gift to your alma mater: $10,000. The net cost of the gift: $7,500 ($10,000 less the income tax deduction you’ll receive by donating the stock directly). The charity (a tax-exempt entity) sells the stock and receives the entire $10,000—not $8,800.

As you can see, donating appreciated securities directly to a charity offers you a more tax-efficient option for fulfilling your charitable goals than selling the stock and writing a check. The charity gets more, and you get a bigger tax deduction.

Donating appreciated assets can yield other important benefits. For instance, it can provide a good exit strategy if you own a long-term stock that no longer meets your overall portfolio objectives; it may also provide a way to reduce the risk of holding a concentrated position in your portfolio. And finally, donating appreciated assets can provide an effective way to “buy low and give high,” especially during a period of positive market performance.

Keep in Mind …

There are certain limits when deducting charitable gifts of appreciated securities.

  • The amount of your deduction is generally limited to 30 percent of your adjusted gross income (AGI). However, you’ll be able to carry forward amounts above that for up to five years.
  • In some cases your charitable contribution may be impacted by the so-called “Pease” limitation. This reduces your total allowable itemized deductions by 3 percent of the amount by which your AGI exceeds $300,000 for married couples filing jointly or $250,000 for single filers.

Donating appreciated assets often provides a more tax-efficient way to make your charitable contributions. However, it is important to explore all of your options before making a significant gift. This is where an experienced financial professional can help. He or she can help you understand your choices and the benefits they offer. Most important, your financial professional can help ensure your charitable contributions provide the maximum benefit for you and the charities you support.

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