Tis the Season to Give Back – and Benefit at the Same Time
If you’re both charitably inclined and financially savvy, it may be a good time to donate stock. It’s the gift that keeps on giving to your recipient and, when you gift shares of stock, you can take advantage of financial benefits for your own bottom line, too.
The truth is, not many people know the ins and outs of donating stock. One study found that only one in five of those asked had ever done so, and only half knew it was even an option. So, whether this is a new concept to you or you’ve been thinking about it for a while, the information below can help you give back to those in need while also maximizing the potential rewards for your generosity.
Benefits for Those Who Donate Stock
If your investment portfolio has grown significantly over the past few years, choosing to donate stock could be a useful option. When you gift shares of stock, you bypass capital gains tax, meaning this strategy can help you donate more efficiently and effectively.
Capital gains taxes occur when you elect to sell shares of stocks that have grown in value. How much you owe depends on a lot of factors, including your total annual income and how long you’ve owned the shares. Because state income taxes and additional charges can eat into how much money you’ll see when you sell, you could potentially lose up to 35% of the stock value.
On the other hand, if you donate directly to your charity of choice, you avoid capital gains tax all together. As an added benefit, the charity won’t incur any tax either, assuming it has non-profit status and is, therefore, tax-exempt.
And one last tax benefit: you’ll even get a tax deduction when you donate, for the full fair market value of the stock, up to 50% of your adjusted gross income. This limit applies to all public charities, all private operating foundations, and certain private foundations that distribute the contributions they receive to public charities and/or private operating foundations within 2 ½ months following the year of receipt.
In short, if you’ve been considering selling stock and donating the money you receive in return, it might be a good idea to reassess.
Remember the Standard Deduction
Though a boost to your tax year certainly isn’t the only reason to consider gifting stock, it is certainly a compelling one. There are a few things you’ll need to consider in advance of making your stock gift plan, namely that the standard deduction for 2022 is $12,950 for single filers and married couples filing separately and $22,900 for married couples filing jointly. In order to benefit from your decision to donate stock to charity, your total tax deductions for the years must be higher than these amounts.
There are several strategies to maximize your outcome. You can choose to make all your planned charitable donations for the next few years all at once, which allows you to itemize an amount that’s higher than the standard deduction. This approach, called bunching deductions, helps you avoid some taxes because you’re donating to charity while increasing your itemized deductions.
Should You Gift Shares of Stock to Charity?
Stock donations can benefit anyone who has owned a stock that’s increased in value for more than one year, though choosing to donate stock is not always right for everyone. As a general rule, the more you earn, the more tax benefits you’ll see.
That doesn’t mean the option to gift shares of stock is only for the super-wealthy, though. Just because the savings won’t be as significant doesn’t mean it’s not worth considering. Retirees are another subset of investors who may want to consider this strategy. With larger portfolios and likely less income, they’re often ok with giving away a bit of their wealth to save on taxes and give back in a way that won’t impact their lifestyle.
If you’re not ready to make a large donation of stock to a charity, but you’re hoping to still benefit from a tax perspective, you could consider a donor-advised fund, which is a dedicated account to support charities that are important to you. Once it’s established, you can then move stock into that fund, and that transfer will give you the same tax benefits as giving stocks directly to a charitable organization.
Understanding the Process
If you think you may want to donate stock to charity or you’re considering a donor-advised fund, the first rule is: don’t delay. Though it’s usually an end-of-year move, many advisors get very busy at the tail end of the year. In order to get the most benefits, you’ll have to make sure your moves can be completed by December 31st.
It’s also an important (though often overlooked) preliminary step to ensure that the receiving charity can accept gifted stock and has a brokerage account. This information is sometimes made public on a charity’s website. If it isn’t, you can reach out to the organization directly to request this information.
The paperwork required to gift shares of stock is fairly straightforward. Your advisor may even have an FAQ available on the web.
How to Gift Shares of Stock: Final Thoughts
Stocks can be a generous and tax-efficient way to put your investments to good use and to feel good about making smart financial decisions for yourself, too. If you’d like to discuss whether the option to donate stock is right for you, please reach out to schedule a meeting. At Davidson Capital Management, we believe in helping our clients make smart decisions with their investment portfolios. We offer a no-obligation portfolio review, and we would be happy to discuss our investment management services, too.