Unlock Tax Savings and Maximize Giving by Donating Stock or Mutual Funds to Charity
Recently, a couple visited our advisors for the first time, seeking guidance on a specific financial challenge. Over time, they had accumulated a significant amount of appreciated company stock, which dominated their investment portfolio and was affecting their overall investment strategy. The couple wanted to reduce their holdings but were unsure how to do so in a tax-efficient manner without incurring a substantial tax bill on the capital gains from the stock’s appreciation.
This couple also valued generosity. They had been giving to their church via direct deposit from their paychecks.
The advisors recognized one way we could streamline their giving, reduce the portfolio risk, and increase the portfolio’s diversification, with a single move: Donating Stock to Charity.
People tend to think first about cash gifts when considering giving to a charity or a cause.
Cash gifts are generous and wonderful, but stock donations offer a powerful way to support the causes you care about while unlocking potential tax benefits. In fact, donating appreciated stocks instead of cash can be more beneficial for both you and the charity you support.
Understanding Stock Donations
Donating stock is similar to donating other assets, but it offers several unique benefits. When you donate stocks directly to a qualified charity, the charity receives the shares and can sell them without paying taxes on the capital gains. As the donor, you may be eligible for a charitable deduction for the full fair market value of the stock at the time of donation, provided you have held the stock for over a year (long-term capital gains).
Top 3 Benefits of Donating Stock or Mutual Funds
- Increased Giving Power
Donating stock allows you to give more to charity without dipping into your cash reserves. Since you avoid paying the capital gains tax, the donation has the potential to be higher and even more impactful than if you had sold the stock and donated the after-tax proceeds.
If you’ve been donating cash, you can make your portfolio whole by reinvesting that cash back into the portfolio to buy back the stock you donated. This creates a win-win-win: the charity receives the same amount you’ve been giving, your portfolio is restored, and your tax burden is reduced.
- Avoidance of Capital Gains Taxes
In our office, we like to say that the “tax tail” should not wag the “dog” for charitable giving, meaning we want the charity or charitable cause to be the driver for the gift and the tax benefits are the cherry on top for the client. The reason for this is that we believe that generosity is the secret to true wealth.
When you donate appreciated stocks or mutual funds you’ve held for over a year, you typically avoid paying capital gains taxes on the gains. For example, if you bought stock for $1,000 and it’s now worth $2,000, you can donate the stock and avoid paying taxes on the $1,000 gain. In addition, you may be able to deduct the full $2,000 value of the stock from your taxable income.
- Simplified Donation Process
Many charities have established processes for accepting stock donations, and the transaction can often be completed electronically through a brokerage account or a Donor-Advised Fund. Donor-Advised Funds (DAFs) allow you to donate stocks directly from an investment portfolio to a fund, which then distributes the donation to the charity of your choice. This can simplify the process and provide you with an efficient donation experience.
Conclusion
Donating stock to a charity is a smart and impactful way to give back, providing both you and the nonprofit with significant financial benefits. The process may seem daunting at first, but once you understand the steps involved it becomes a straightforward way to support the causes you care about.
Ready to make a stock donation? Sound Stewardship believes strongly in being generous with the resources we have been blessed with, so much so that it is one of our core principles. Start by selecting a charity and consulting your Sound Stewardship Wealth Advisor.
