Philanthropic Planning: Maximize Capital Gains by Gifting Appreciated Stock

December 6, 2023
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Charitable giving can be a smart financial strategy from a tax perspective, and you can also do a lot of good by supporting your favorite charitable organizations. Last week, we discussed some general charitable gifting strategies. [Click here to read the article.] This week, we will continue this message with a focus on donated long-term appreciated securities.

Gifting Appreciated Securities

Rather than simply donating cash, you can opt to give appreciated securities such as stocks, bonds and mutual funds. These financial assets can be gifted directly to charities and you can contribute the after-tax proceeds. By doing this, you may be able to increase your gift to the nonprofit and your eligible tax deduction.

When you donate a security to a charitable organization, you are able to take a tax deduction for the full fair market value of that asset. In addition, donating stock can allow for an instant tax deduction increase of over 20% because you won’t be paying the capital gains tax. The same is true for mutual funds and bonds.

Give More. Deduct More.

Let’s say you have security holdings that were originally purchased for $300,000 with a Federal long-term capital gains tax rate of 23.8%. The current value of the securities is $450,000. If you sold those securities, you would be paying a capital gains tax of $35,700 and be left with $414,300 cash that you could then donate. The net amount would also be what you claim for your charitable tax deduction.

On the other hand, you could donate the full appreciated securities directly to the charity. They would get the entire $450,000 and be able to sell the stock without paying capital gains because of the nonprofit status. You then get to deduct the full amount on your taxes. Donating the stock allows for a larger donation, no capital gains and a larger charitable tax deduction for yourself. Everyone wins except the IRS.

A Proven Gifting Strategy

Similar strategies can be implemented with other appreciated financial assets like real estate. Of course, this strategy hinges on the fact that you are planning to donate that asset to a chosen charitable organization. If you want the cash for something else, then you will sell and pay the long-term capital gains tax or explore other options like a 1031 exchange.

Gifting appreciated stock or other securities is an excellent charitable giving strategy. You can help out charitable organizations even more while enjoying the tax benefits. It’s important to make sure you employ the right approach to gifting appreciated securities. Work with a trusted financial planner and tax advisor to ensure the best outcomes for you and the charity.

To learn more, contact Illumination Wealth today.