Gifting Your Gains Can Save You Money

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Americans are a generous people, and this is the time of year when most people do their charitable giving.

Last week we saw how selling investments with losses can reduce your taxes. This week we will see how gifting investments with gains can also reduce your taxes.

No matter what worthy organizations you support, you can give up to 15% more if you give them appreciated stock instead of cash. If you sell $1,000 worth of appreciated stock you will have to pay the capital gains tax of 15%. If most of the stock’s value is appreciation, the amount of the tax approaches $150, leaving only $850 for charitable giving.

If, however, you give the stock directly to the charitable organization, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when they sell the stock. You could save up to $150 on capital gains taxes and the gift itself reduces your taxes at your marginal rate. In total, your $1,000 gift could cost you $500 or less if you use appreciated stock!

Here’s what you need to do:

1. Ask your financial advisor which stocks would be the best for charitable giving. Generally, these are the stocks that have appreciated the most, and which you do not want to continue holding in your portfolio.

2. Determine how much you wish to give to each charity. Then divide the current price of the stock into the amount you wish to give to compute how many shares of stock to give to each charity. The number of shares will not work out exactly so you will have to round up or down.

3. Call the charities you give to and ask for their “stock liquidation brokerage account.” Nearly every charity has such an account just for this purpose. Sometimes this is difficult for people who like to give anonymously and without fanfare, but once you have this account number you will not need to ask for it again in the future.

4. Draft a letter to your brokerage firm and ask that the correct number of shares be transferred from your brokerage account into the charity’s stock liquidation account. You can fax these instructions directly to your brokerage account and then send the original by postal mail.

5. Save these letters and account numbers for next year’s charitable giving.

6. Report these gifts to your tax accountant. Stock gifting is deductible at the fair market value computed as the amount the stock was worth at close of the day the stock was transferred out of your account. The stock may change value during the days after you have transferred the stock but before the charitable organization sells the stock. These changes do not affect the amount of your tax deduction. It does sometimes cause the charity to report to you a different amount than you should report on your tax return.

Giving appreciated stock is a good way of reducing your taxes and giving more generously to worthy charities.

Photo by Ekaterina Shevchenko on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.