It’s that time of year: The air feels crisper, the leaves look redder, and pumpkin spice futures suddenly seem like a good investment. But it’s also a key time of year for something that’s actually a thing: charitable donations.
Why now? According to a study by the Network for Good of donations made through its platform, in 2015, 29% of all giving occurred in December, and more than 11% took place in the final three days of the year. That’s some pretty stellar procrastination. However, if investors want to make the biggest impact on the cause of their choice—and cause the least tax impact to themselves—now is the time to plan and execute their end-of-year charitable-giving strategy.
That’s because the best way for investors to give charitably is by donating stock—not sending cash.
Reason 1: Like cash, donating stock to charity is tax deductible
Charitable donations are deductible only for those taxpayers who itemize deductions. But thanks to the tax-law change, for 2018 the hurdle for itemization is now higher: The standard federal deduction has doubled, to $12,000 for individuals and $24,000 for married couples filing jointly.
But high-net-worth investors with appreciated portfolios should have little difficulty stepping over this hurdle, by either itemizing deductions for other purposes or making sufficient charitable donations to clear the standard-deduction bar. Either way, this deduction remains a powerful way for those with the means to do so to help themselves while also helping the organizations they choose to support. And the deduction is the same whether the donation is made in cash or stock. Investors should keep in mind, however, that a donation in appreciated stock must be limited to 30% of their adjusted gross income (AGI).
Reason 2: Donating stock takes tax liability out of the portfolio
Having a highly appreciated position in a portfolio is great...until the investor is ready to sell that position. Then, given a potential 23.8% federal capital gains tax bite (if we factor in the 3.8% Medicare surtax that applies to high earners), it may not be so great, depending on one’s appetite for tax liability.
Donating the highly appreciated stock to charity removes that liability entirely, enabling investors to make their desired donation, deduct the value of the donation from their AGI, and never have to worry about the capital gains tax they would otherwise have had to pay if they’d sold the stock.
Another option would be to set up a donor-advised fund. This allows the investor to move appreciated stock into the fund without any tax penalty, then decide over time how to donate assets in the fund to charitable organizations.
Reason 3: There’s a better use for cash
Donating stock from a portfolio, then depositing into the portfolio an amount of cash equal to the value of the stocks gifted sets the investor up for future tax-saving opportunities. For example, the investor can use the deposited cash to purchase stocks that allow the portfolio to maintain the investor’s chosen market exposure but that have a higher cost basis than the gifted shares. This higher-basis investment increases the potential for eventual tax-loss harvesting, which should help reduce future tax payments.
Reason 4: Donating stock increases the size of the gift
We saved the best reason for last. Many investors sell stock to raise cash for charitable donations. Yet when you donate stock to a charity instead, you get the added benefit of receiving a tax deduction for the stock’s full fair-market value. As the below example demonstrates, this approach can also represent an increase of over 10% in the size of the gift as opposed to selling the shares and then donating the cash, since you avoid the payment of capital gains tax incurred when selling the shares.
1Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% plus the 3.8% Medicare surtax, for a total rate of 23.8%. Does not take into account state and local sales tax, if any apply.
The upshot: Donating stock means you can end up not only donating a higher dollar amount to your favorite charity but also increasing your charitable tax deduction in the process.
The bottom line
Making charitable gifts in cash is a natural instinct for many people. After all, cash gifts may lessen an investor’s current tax bill by reducing taxable income by the amount of the gift (subject to limitations, of course). But cash gifts aren’t the only option. And, for the reasons listed above, they may not even be the best option.
Charitably minded investors with appreciated positions should consider donating stock. Because sometimes the kindest donations are the ones made in kind.
Wash Sales: How to Keep Your Tax Losses from Shrinking
Want to use your investment losses for tax purposes? Running afoul of the IRS’s wash-sale rule is like accidentally laundering your favorite wool sweater in the hot-water cycle. Here's what you need to know to avoid being hung out to dry.
Tax-Management Strategies for Appreciated Portfolios
When you have positions with large embedded gains and few that are candidates for loss harvesting, tax-management techniques can appear to no longer work. But that isn't game over. We look at four options to help investors navigate their tax situation.
Rey Santodomingo, CFA - Managing Director of Investment Strategy
Mr. Santodomingo is responsible for all aspects of Parametric’s Tax-Managed Equity Strategies. As one of the primary strategists for Custom Core™, he works closely with taxable clients and advisers to design, develop and implement custom portfolio solutions.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.