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INSIGHT

Donating Appreciated Stock

Alex LaRosa, CFP®

Alex LaRosa, CFP®

Investment Advisor Representative

June 23, 2021

I wanted to blog about this topic because of a recent discussion I had with one of our clients. The client wished to make a large donation to a charitable organization. After speaking with the charity and doing some research they had the idea that a Charitable Remainder Annuity trust may be the best way to accomplish the goal for all parties.

However, there was another strategy that could not only accomplish the goals but may be an even better choice for their individual situation. That strategy is donating appreciated stock.

What is it? How does it work? And who should consider doing it?

Donating appreciated stock is the process of transferring securities selected by you to the charity. The charity then sells the shares and uses the proceeds as they see fit. Donating stock accomplishes three main objectives:

  1. Gives funds to a charity of your choosing
  2. Helps you avoid capital gains tax on highly appreciated holdings
  3. Provides for an income deduction of up 30% of your adjusted gross income and allows you to carryover for five years if your deduction exceeds AGI limits in a given year

Case Study

Let us look at two individuals who want to donate $40,000 to charity. They both hold a security that was purchased for $10,000 and is now worth $40,000 so there is $30,000 in unrealized long-term gains. Both individuals are in the 23.8% long-term capital gains bracket.

Individual #1 sells the shares and donates the after-tax proceeds. By realizing a gain of $30,000, he must pay $7,140 in federal taxes (20% capital gains rate + 3.8% Medicare tax). They write a check for the remaining $32,860. Assuming they are in the 33% tax bracket, their $32,860 charitable deduction provides them with $10,844 in tax savings.

Individual #2 instead decides to donate the stock directly to the same charity. The transfer does not require them to sell any part of the investment and does not trigger any gains. The charity receives the full value of the investment (and is not required to pay any capital gains tax once liquidated in their account). Individual #2 receives a charitable deduction for the full $40,000 value of the investment. If they are also in the 33% tax bracket, their $40,000 contribution generates a tax savings of $13,200.

In summary, individual #2 can give $7,140 more to charity and realize $2,356 more in tax savings by simply donating appreciated stock versus selling it and giving cash.

Individual #2 (Blue)      Individual #1( Orange)

Conclusion

Donating appreciated stock may be a financially effective way to satisfy your philanthropic endeavors. However, everyone’s situation is different so always discuss your plans with both your advisor and your tax preparer before moving forward. 

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Donating Appreciated Stock

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