Charitable Giving Strategy: Donating Appreciated Stock

by | | Other Cool Stuff, Taxes

donations

Donating cash is great, but you get more bang for your buck by donating appreciated stock or other investments that have risen in value.

Donating appreciated stock has powerful tax benefits:

  • Save income tax.
  • Avoid capital gains tax now.
  • Avoid capital gains later.

Save income tax

You get an income tax deduction for the full fair market value of the stock. For example, if you donate $20K of stock, you get a $20K deduction, even if you only bought the stock for $5K!

The deduction is limited to 30% of your Adjusted Gross Income (AGI), but that usually isn’t a problem because ER docs working full-time have a high AGI.

Important: You need to be itemizing deductions to actually save income tax with charitable donations.

Avoid capital gains tax now

By donating stock, you avoid the capital gains tax you would have paid if you sold it. So does the charity! No one ever pays this tax.

In the above example, you bought a stock for $5K and now it’s worth $20K. Your capital gain is $15K.

The $15K capital gain is “unrealized” for tax purposes. In other words, it’s just a paper gain. You pay capital gains tax when you “realize” the gain by selling the stock.

  • If you sell the stock and give the $20K proceeds to charity, you owe $2,250 of tax ($15K gain x 15%).
  • If you give the stock to charity, they sell it tax-free and you pay no tax either!

Avoid capital gains tax later

You might think it’s better to donate cash, and leave your investments intact to grow. But donating stock is powerful, as we’ve shown. So have your cake and eat it too! Just use cash to buy back the stock you donated.

  • Donate $20K of XYZ stock to charity. This stock had $5K cost basis for tax purposes and $15K of unrealized gain.
  • Now take $20K cash and buy XYZ stock. The new stock has $20K cost basis and no unrealized gain.

You still have the same amount of stock, but you’ve avoided capital gains tax now, and reset your cost basis to $20K so you have less capital gain to pay tax on later!

Saving income tax and avoiding capital gains tax are huge benefits of donating appreciated stock. To go a step further, bunch multiple years of planned donations into a single tax year by using a donor-advised fund. MIND = BLOWN.

If you’d like help donating appreciated stock, schedule a FREE Financial Pulse Assessment™. This is a 3 step process to help you get clarity on your finances and “test drive” our services.

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