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Donation of Appreciated Stock, Donor Advised Funds, etc.

Most taxpayers exercise their generosity and their tax saving strategies by making charitable donations in the form of cash or non-cash goods. These gifts could mean tax savings if you itemize for the year. Did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?

 Two benefits from one gift

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:

  1. If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
  2. You can avoid the capital gains tax you would have paid on any gains on the sale of the stock.

Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Stock vs. cash

If you donate $10,000 of stock for which you paid $3,000, you are in the top tax brackets and you itemize your deductions. This means your ordinary income tax rate Is 37%, your long-term capital gains rate is 20%, and you are subject to the NIIT of 3.8%. If you sold the stock, you would pay $1,666 in tax on the $7,000 gain. If instead, you donated the stock to charity, you would save about $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.

Additional items to consider

While considering the benefits of donating appreciated stock you want to consider a few items. First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,200 for singles and married couples filing separately, $18,350 for heads of households, and $24,400 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you have itemized deductions in the past, you might not benefit from doing so for 2019.

It should be noted, however, if you are over age 70 ½ and utilizing the standard deduction, you may benefit from making Qualified Charitable Donations (QCD). A QCD is a direct transfer of funds from your IRA custodian directly payable to a qualified charity. While beyond the scope of this article, utilizing QCD could reduce our tax exposure.

You can find more information on this in a prior article located here:

Charitable IRA Rollovers May be Especially Beneficial in 2018

Please also beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).

Finally, you want to make sure to get the most benefit of your gift by donating appreciated stock. If you want to donate stock that is held in a loss position for any reason, the better option is to sell loss stock so you can deduct the loss and then donate the cash proceeds to charity. If you want to make a large contribution in a single year that can turn into multiple charitable gifts over subsequent years, you can consider donating cash, stock, or other assets into a Donor Advised Fund, or DAF. These funds are frequently run by financial services companies (Fidelity, Charles Schwab, etc.). A large donation to the DAF will create an immediate deduction in the tax year of donation, but the funds do not need to go to a qualified charity in the same year. Distributions from a charitable fund can be spread out over multiple years, while the benefit can be concentrated in one.

Donor Advised Funds

If you want to make a large contribution in a single year that can turn into multiple charitable gifts over subsequent years, you can consider donating cash, stock, or other assets into a Donor Advised Fund, or DAF. These funds are frequently run by financial services companies (Fidelity, Charles Schwab, etc.). A large donation to the DAF will create an immediate deduction in the tax year of donation, but the funds do not need to go to a qualified charity in the same year. Distributions from a charitable fund can be spread out over multiple years, while the benefit can be concentrated in one.

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