Dec 27, 2022
A good time to give – And to get a quadruple benefit
Oh, what a volatile year it’s been in the markets! From rising inflation and higher interest rates to ongoing geopolitical issues and the continued impact of the pandemic, there’s been no shortage of factors driving markets all over the map in 2022.
While stocks in general have declined, of course not everything has gone down in value. If you happen to hold certain stocks that have made decent gains over the year, you may want to rebalance your portfolio, reducing positions in stocks that have done well and buying other asset classes to maintain your target asset allocation. While we think rebalancing to manage risk is a critical investment discipline, the downside of selling strong-performing stocks is that you could end up with a capital gains tax bill.
If you’re charitably inclined, we think that now is an especially good time to donate stocks that have risen in value. Gifting appreciated stock is not only a beneficial way to avoid a hefty capital gain tax, it can also be fulfilling to give to a charitable organization. As long as you’ve held the stock for more than a year, you can get a quadruple benefit from the gift by donating the stock to a qualified 501(c)(3) charity instead of selling it. Here are the four primary benefits as we see them:
- Get a tax deduction for the fair market value of the stock. Note: you do have to itemize deductions to receive this benefit.
- Avoid paying capital gains tax on the appreciated value of the stock.
- Rebalance your portfolio to trim highly appreciated positions and invest in others where good opportunities exist.
- Help others by donating to those in need. With no capital gains tax applied, you can donate the full value of your appreciated stock, giving the charity more money to put to use.
As noted, there are many tax incentives for charitable giving. Here’s a hypothetical example:
Let’s say that Sarah bought $10,000 of a particular stock in March 2020, when prices had fallen sharply as the pandemic began. Now, the stock’s current value is $16,110. If she sells the stock, she will have $6,110 in capital gains.
Sarah loves supporting her local food bank. She decides to donate the stock to the food bank instead. In return, she:
- Gets a tax deduction for $16,110.
- Avoids paying tax on $6,110 in capital gains.
- Trims this particular stock position in her portfolio, rebalancing closer to her target asset allocation.
- Helps the food bank serve even more people.
What would have happened if Sarah had decided instead to sell the stock and donate the net proceeds?
Let’s assume she pays a federal capital gains tax rate of 23.8% and itemizes deductions.
| Stock sale: | $16,110 |
| Purchase price: | $10,000 |
| Capital gains: | $6,110 |
| Tax on capital gains: | 23.8% x $6,110 = $1,454 |
| Net cash amount available to donate: | $16,110 – $1,454 = $14,656 |
In addition to paying the $1,454 in capital gains tax if she were to sell the stock and donate the proceeds, Sarah would also get a lower itemized deduction, leading to a higher tax bill. If we assume Sarah is paying taxes at a marginal federal tax rate of 37%, then her itemized deduction would save her 37% x $14,656 = $5,423 in taxes.
On an overall basis, Sarah would receive a net tax benefit of $3,969 if she sold the shares and donated the net proceeds after paying capital gains tax ($5,423 itemized deduction, less capital gains tax of $1,454). Contrast that with the 37% x $16,110 = $5,961 in tax savings if she donates the stock directly, a 50% increase in her tax benefit by donating the shares directly.
In either case, she doesn’t own $16,110 of this stock anymore. Donating the shares directly to charity allows the charity to receive a larger gift and saves Sarah taxes at the same time! Depending on the income tax laws in her state, Sarah may also receive an even greater benefit for her appreciated stock donation.
What if you would like to donate your stock but aren’t yet sure what charity you’d like to support? When it comes to gifting stock, you can also consider using a Donor Advised Fund (DAF).
When you gift appreciated stock to a DAF, you get a tax deduction at the time of your gift, and you still avoid paying capital gains taxes.1 The funds are invested and potentially grow in value over time. You serve as a “grant maker,” selecting charities to receive the funds over time.
If you’d like help with your charitable giving strategies, want to find tax-smart ways to rebalance your portfolio or have any other financial questions, please contact us to speak with an experienced CI Private Wealth financial advisor.
ABOUT THE AUTHOR
Hope Carlson, CFP, CAP
Hope joined Dowling & Yahnke in 2017. She holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Advisor in Philanthropy® (CAP®) designations.
Prior to Dowling & Yahnke, Hope spent six years as the Chief Development Officer at the Museum of Us, overseeing fundraising and marketing. She also served as the Interim Executive Director for the San Diego Civic Youth Ballet in Balboa Park and spent four years as a strategy consultant with the Boston Consulting Group.
Hope holds a Master of Business Administration (MBA) from Harvard Business School where she was a Baker Scholar, graduating in the top 5% of her class. She also obtained her Master of Music in Vocal Performance and Literature from the Eastman School of Music and holds a Bachelor of Arts in Economics with Highest Distinction from the University of Virginia.
Trained as an opera singer, Hope is passionate about music and the arts. She lives in La Jolla with her husband and two daughters.
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