One of the basics of good financial stewardship is charitable giving. You don’t have to get out your checkbook (or, more likely, use your credit card) to be generous, however. It’s possible for you to be savvy in your financial giving by providing the gift of stock shares.
When you give investments, you can deduct the full value of the asset on your taxes and the charity gets the full benefit as well, since the recipient doesn’t have to pay taxes on the gains if it decides to sell.
Donate a winning investment.
Say you plan to donate $2,000 to charity. You can donate cash and receive your tax deduction straight up. But what if you also have some appreciating shares that you want to sell for profit? You bought them 10 years ago for $1,000, and now they are worth $2,000. If you simply sell the shares, you have a capital gain of $1,000. If you fall into a tax bracket where you pay the 15 percent capital gains tax rate, you will owe $150 in taxes on that gain. That tax bill will partially offset any benefit you received from donating cash to the charity.
But what if, instead of donating cash, you donate the stock? You keep that $2,000 would-be donation in your bank account (leaving it free for use however you want – even reinvesting), and you transfer ownership of the shares to the charity. You get to claim the entire $2,000 as a deduction on your taxes, but you don’t have to pay any capital gains tax.
You receive the full deduction for a charitable contribution, and it isn’t partially offset by your capital gains tax bill. This can be a great way to strategize at the end of the year if you have some appreciated shares you want to redeem, whether you are looking for cash, or whether you are trying to rebalance your portfolio. You can actually purchase the same stock that you donated to charity, and although you received a tax deduction for the donation, you can still obtain a stepped-up tax basis in the stock so that if you do sell that stock in the future you will have removed at least a portion of the taxable gain.
What about losing investments?
While donating shares to charity can be a solid move when you have stocks that have been gaining, it’s better not to donate losing shares to charity. When you donate a stock, you are only allowed to deduct the current value of the investment. So, if you invested $1,000 in a stock 10 years ago, but now it’s only worth $200, you would only get to deduct that $200 on your taxes. Hardly a significant deduction.
In these cases, it’s better to sell the stock shares. If you sell at $200, you see a loss of $800. That $800 can be used to offset any capital gains from the sale of appreciated shares, or it can be deduct from other income, up to $3,000 total for the year. With the right planning, you can get extra benefits. Sell the shares and tax harvest the $800 losses. Then you can donate the $200 in cash you have as a result of the stock sale to the charity and deduct that amount.
What about a charitable trust?
It’s also possible to receive some tax benefit from charitable trusts. You can establish a trust designed to benefit the charity of your choice, and keep investments in it. There are ways to structure a charitable trust so that the income from the investments held in the trust are split between the donor and the charity. There are also structures that allow the donor to retain ownership of the investments included in the trust. Check with an estate planning attorney or some other specialist for more information about how to structure charitable trusts so that you receive tax benefits from your donations of investments.