Tax-Wise Charitable Giving: Donating Appreciated Assets

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Due to the tax reform legislation that was signed into law in December, there was an emphasis among some to make charitable gifts before the end of the year. This is because the standard deduction has been doubled, so fewer households will be utilizing itemized deductions like the charitable contribution deduction.

Despite this change, many households will continue to itemize their deductions and will remain eligible for this particular one.

If you’re like me, you don’t give money to charity just to receive tax benefits. This doesn’t mean, however, that you shouldn’t take advantage of tax breaks you could receive by making charitable contributions.

One potentially smart – but often overlooked – charitable-giving tax break comes through donating appreciated assets instead of giving cash or checks to nonprofit organizations. These assets may include real estate, common stock or other securities. This strategy can result in benefits for both you and the charities to which you give.

Benefits from Donating Appreciated Assets

What are the benefits of using this strategy? The qualified charitable organization of your choice can receive the full benefit of the appreciated asset’s current market value, while you may be able to save capital gains taxes of up to 15% or 20% on the appreciation. You may also be able to deduct more than what you paid for the asset, and you won’t have to deplete your cash accounts to make the gift, which can give you more financial flexibility.

An Example of the Benefits

Here’s an example that helps illustrate the potential tax benefits of this strategy. Let’s say you are in the 15% capital gains tax bracket and bought a stock in 2009 for $5,000. With the big gains in the stock market since then, this stock has quadrupled in value and is now worth $20,000.

If you sold the stock and gave the proceeds to charity, you would pay capital gains taxes of $2,250 on the sale. As a result, you’d only have $17,750 to donate instead of the full $20,000.

But if you transfer ownership of the stock directly to the qualified charitable organization, then neither you nor the charity will have to pay capital gains taxes on the $15,000 in appreciation, which means the charity will receive the entire $20,000 gift. Meanwhile, you can deduct the full $20,000 value of the stock – not just the $5,000 you paid for the stock nine years ago.

And don’t forget the fact that this strategy preserves your cash balances, which you could keep in your contingency fund or use for other savings goals.

Potential Limitations

Keep in mind that this strategy only works with appreciated stocks that you have owned for more than one year within a taxable account and if you claim itemized deductions rather than the standard deduction. If you give a short-term position – one that you have owned for 365 days or less – you will only be able to deduct the cost basis — or in other words, what you originally paid for it – not what it’s worth now.

Our Take

With the big run-up in stock values over the past several years, this strategy of donating appreciated assets might be even more applicable now than usual. Before taking action, you should speak with a tax and/or investment professional about the details of implementing this charitable giving strategy.

Read our free Personal Capital 2018 Tax Guide for Holistic Financial Planning to learn more about taxes and your long-term financial planning.

Download guide

This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.

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Gregory DePalma, CFP®

Gregory DePalma, CFP®

Gregory DePalma is a Senior Financial Advisor at Personal Capital. He provides holistic financial planning services for individuals and families. Prior to Personal Capital he was a stockbroker at Scottrade and served as a Financial Advisor specializing in student aid and education funding. He received his bachelor’s degree from the University of California, Davis with a double major in Economics and Sociology. Gregory is a CFP® professional.
Gregory DePalma, CFP®

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