Cash is often the go to option for charitable giving, but by donating appreciated stock instead, you may get more bang for your buck.
Creating a legacy is all about strategic financial planning, and that applies whether your goals are to provide support for charities, heirs, or a combination of both. The struggle for many of us when charitable legacy planning factors into our goals, is keeping this in mind when it comes to our charitable donations. Donating any amount to charitable causes seems like a good thing (and it is), but if we wish to make the most of our legacy, we must not just donate but donate strategically.
One of the most overlooked ways to make your donations more effective may be as simple as donating appreciated stock instead of cash. This is a strategy I employ often with my clients.
Why Donate Stock Instead of Cash?
When it comes time to make charitable gifts, many people just gift cash. While there’s nothing inherently wrong with gifting cash, and it may even be the better option for some (we’ll discuss this more later in this post), there are some people for whom donating securities is the more strategic solution.
So, how do you know if you should consider donating stock instead of cash?
Everyone is unique, so before you decide how best to make a donation, you should always talk to your financial advisor; however, in general, donating appreciated securities is often a useful strategy for those who are further along in their careers or retired. That’s because, in order to benefit from gifting appreciated securities, you must first have accumulated significant assets. Of course, anyone who has begun accumulating significant assets may potentially benefit from this strategy, but typically those at the beginning of their careers lack the necessary assets.
If you’re starting to build up significant assets in a taxable brokerage account and your investments are presumably growing over time, just gifting cash misses out on a valuable opportunity, specifically, the potential tax benefits of donating stock as opposed to cash.
The Tax Benefits of Donating Stock
By gifting appreciated securities from your taxable brokerage account instead of donating cash you get a double tax benefit.
1) Charitable Deduction
One of the advantages of charitable giving is the charitable tax deduction you can claim. You can claim the charitable deduction on the full amount gifted to charity, just like with cash (though the deduction limits as a percentage of adjusted gross income (AGI) differs, which I’ll address more specifically in just a bit).
2) Avoid Capital Gains Tax
By donating appreciated securities, you avoid ever having to pay taxes on the gains, which is beneficial because these taxes can end up eating significantly into your gains. In 2021, if you have an annual income over $40,000 if filing individually or $80,000 if filing jointly, the long-term capital gains rate (the rate for securities you’ve held for a year or more) will be either 15% or 20%, depending on your income.
Donating stock doesn’t negatively impact the charity you choose to donate to, since the charity can simply sell the securities tax-free to convert the gift to cash. And if you want, you can always use your cash to buy additional shares of the same securities you just gifted, effectively stepping up your cost basis to the current market value.
Specific Identification Cost Basis Election
If you want to take further advantage of donating appreciated securities, you can also consider electing the “Specific Identification” cost basis, which allows for precision gifting that can be used strategically, like a surgeon’s scalpel, to create the most tax-efficient giving.
How does specific identification costs basis differ from average cost basis?
As you make contributions to a regular, taxable brokerage account, you will buy a given security on different dates over time. This means you’ll have several lots, which are just the same security purchased on different dates, typically with different purchase prices due to market fluctuation.
Most brokerage firms default your cost basis election to “Average Cost”, meaning every time you sell a security, it uses the average cost basis across all the lots of that security to determine the taxable gains being realized. If you change the cost basis election to “Specific Identification”, you are then able to specifically identify which lots to sell to produce the desired tax consequence. This requires a bit of effort to change the election, but I would argue it is worth it.
Once you elect “Specific Identification” for your cost basis, you can then choose the most highly appreciated lots to use for charitable gifting, thereby minimizing tax liability and maximizing charitable giving potential. Conversely, you should sell positions with unrealized losses prior to giving to charity, so you reap the tax benefit of the realized loss.
Tax Deduction Limits for Gifts of Appreciated Securities
One caveat we need to address is that the tax deduction limit for gifts of appreciated property differs from the tax deduction limit for gifts of cash.
The tax deduction limit for appreciated securities is only 30% of AGI while for cash gifts it is 60% of AGI (with both allowing a five-year carryforward for any unused deduction), meaning you can gift a higher amount in cash and still get the full tax benefit.
Why am I only mentioning this now?
While the difference in the tax deduction limits seems dramatic, keep in mind it only applies if you plan to donate more than 30% of your AGI, which does not apply to most charitable givers. For anyone planning to gift less than 30% of their gross income each year, appreciated assets may be the way to go.
Another planning opportunity is to gift large amounts of appreciated assets in years when you have taxable income spikes, using a strategy called “charitable bunching”, which will be a topic for another blog post.
The Takeaway
Strategic charitable legacy planning requires a comprehensive approach, covering everything from investments to donations because every dollar you save through strategic financial planning is one more dollar you can put towards supporting the causes and people you care about.
For more strategies to help you make the most of every dollar, feel free to subscribe to The Legacy Builder blog if you haven’t already, or schedule a free initial consultation with us – we would be happy to help.