How many of you know that charities do not pay taxes? So if you gift your favorite charity your long-term highly appreciated stock, you get the tax benefit from the whole amount and the gains are effectively tax-free. This is the kind of thing that will save an investor with a good pretax investment gain from paying taxes more in taxes than are needed and is just the kind of thing Independent Financial Planning looks for when reviewing a portfolio and getting to know you.
Most people just give cash to their church or charity but every major charity has a brokerage account set up and ready to do just one thing – sell your stock gifts as soon as possible and deliver the cash to the charity’s coffers. Gifting stock to charity is a rather simple process and I’ve been doing it for years, saving clients’ money from the IRS every time.
Let’s look at an example. A client has a stock position he’s inherited from his grandfather. It isn’t in a retirement account and unfortunately he can’t even find the basis of the stock (basis is the amount he paid for it). It’s worth $100 per share now and he has 500 shares. If I were to sell the stock and take the cash to give to charity he would have to pay taxes on the amount of gains. And in this case because he lacks documentation, the basis would be determined by best-efforts to identify the price of the stock at purchase after correcting for dividends, spin offs, and stock splits (which is kind of a hassle but I’ve done it more times than I wish). Let’s say the basis per share comes out to be $2. That means that $98 per share is the long-term capital gain, taxed at 15%. If the investor wanted to give $5,000 to charity he would have to sell 9 additional shares or 59 shares total instead of 50 shares to cover the tax of $852.60. Or he could save that $852.60 by gifting the shares directly to the charity.
A good strategy to get the tax benefit but not lose value in your account is to gift at the beginning of the year and then use the monthly cash flow you would have given to charity to refill the account. This way an investor is again effectively reducing her tax burden by starting fresh in a new position with a high basis (cost of shares) rather than having her older, lower basis in the original position.
Remember also that there is a second tax benefit to giving to a qualified charity: an itemized deduction. For those of you who file your taxes and elect itemized deductions, you can include charitable gifts in that equation. This is like a double benefit when you’ve gifted appreciated stock. You not only get to escape that long-term unrealized gain but you also get to take the deduction based on your tax bracket.
Finally, be sure that if you gift stock, it’s been held for at least a year and is considered long term. If it is short term then the charity can only record the contribution based on the cost basis and the taxes remain in your ledger paid at your ordinary income rate.
Independent Financial Planning loves to see people give to the causes they care about. Your charities love to receive your contributions, stock or cash, car or boat. So be wise in your giving and make it a win-win. Feel free to ask a question and learn more.
