Investors can reduce their tax bills and do some good by donating appreciating stocks to charity
It’s always a good feeling when a stock significantly appreciates as your investment strategy pays off. But there will be a tax bill associated with your successes.
Savvy investors use various strategies for minimizing this amount, including making some charitable donations and receiving a tax deduction in exchange for their generosity. It’s also possible to donate the appreciated stock directly, bringing about even more savings.
Here’s a look at how a well-timed stock donation can help you keep more of what you’ve earned, even as you let some of it go for a good cause.
Receive a tax deduction
A stock donation works similarly to a cash donation, as contributions to 501(c)(3) nonprofits are tax-deductible. As a result, you’re eligible for a deduction equal to the value of any stocks you gift to a charity.
The amount of tax savings depends on various factors, including income and other taxes you’re paying. However, donating an appreciated stock leads to significant savings if these assets’ market value is high.
Remember that this gift’s timing is essential because you must donate within the calendar year for the deduction to appear on that year’s taxes. So, to benefit from a significant tax break on your 2023 taxes, you must donate on or before December 31, 2023.
There are deduction limits that you’ll want to consider, too. Generally, these rules permit you to donate up to 60% of your adjusted gross income to charity, although there are exceptions. There’s a complicated procedure associated with determining the exact amount you can give, so you’ll want to receive some professional advice before filing.
Income tax deductions are only part of the equation here, as you can also reduce your capital gains taxes in a couple of ways.
How to save on capital gains via donated stocks
Capital gains aren’t paid on donated stocks. Picture a scenario where you purchased $500,000 worth of stock five years ago, and the stock is now worth $750,000. Under ordinary circumstances, you’d have to pay capital gains tax on that $250,000 appreciation if you sell it.
The actual amount you’d pay in capital gains tax depends on your other income, but you might end up in the 20% bracket. Therefore, this appreciation would lead to $50,000 in additional tax owed when you sell the stock.
Even if you donate the stock’s cash value to charity after selling it, you’re on the hook for the $50,000 in capital gains taxes. By donating the appreciated stock directly to a charity, you won’t have to pay the tax on the appreciation. The charity gets more money, and you receive a more significant deduction. Keep in mind that you don’t have to donate all of the stock—you can give a portion of these assets and hold onto the rest.
You can reduce future capital gains, too, by averaging up your cost basis. The idea is that you donate some shares of appreciated stock and then buy more at current market value. In doing so, you increase your average share cost, lowering the capital gains you’ll owe on the appreciation when you sell.
Other stock donation benefits
In addition to saving on taxes, there are other pluses associated with stock donations.
You’re helping members of the community by funding a charity, of course. By carefully selecting an organization, you can make a difference by financing projects important to you. And you can give up to 20% more by saving on capital gains.
Another, sometimes underrated, benefit of donating stocks is that it allows you to give your portfolio a quick health check. Rebalancing a portfolio and optimizing it for risk is something to be considered regularly, with the caveat that you’ll have to pay capital gains on appreciated assets when you sell them.
By donating some of these stocks, you can rebalance your portfolio to maximize future performance and minimize risk without that money going to the IRS. Your capital gains will fund your philanthropy, and you can use this strategy to reduce an overall tax burden.
Of course, speaking with a wealth management advisor can help ensure you maximize tax efficiency while implementing strategies designed to meet your individual goals. Contact Lindberg & Ripple to learn more about our wealth management services.