Have you ever dreamed of emulating the famous billionaire investor Warren Buffett?
While you may be a few billion dollars short of matching his wealth, there is one place you can take his lead: donating your stock to charity.
Gifting stock can give you the positive emotional boost of making an impact at your favorite charities. It also has a nice financial benefit: sending your hard-earned money somewhere besides the IRS.
There are several reasons why donating stocks over cash might be a smart choice for you and your legacy. Justin Waring, Investment Strategist Americas at UBS Financial Services Inc., shares a few things to consider when donating stock.
- Giving away shares with unrealized capital gains helps reduce your own capital gains exposure, similar to strategies like tax-loss harvesting
- A donor-advised fund (DAF) enables you to reinvest your stocks, so that they have a chance to grow before being donated to the charity of your choice—maximizing the impact of your gift
- In addition to financial and societal benefits, philanthropy comes with emotional benefits that are best enjoyed while you’re still alive
Before you donate, know the rules
Giving stock has become an increasingly popular option for many. However, it's also important to know how to get the most bang for your buck.
Ideally, you can maximize your donation by choosing a stock that has increased in value.
One reason that investments are an excellent tool for giving more to charity is due to the way that capital gains taxes work. For example, if you bought Company X stock at $100 a share, and it is worth $1,000 a share today, you have a $900 unrealized "capital gain." Assuming a 20% long-term capital gains tax rate, plus a 3.8% net investment income tax, selling it would require you to pay about $214 of capital gains taxes for each share you sell. This would leave just $786 of after-tax cash to give to your preferred charity. By contrast, giving the stock directly to the charity would allow you to donate the full $1,000 per share value (27% more).
"In addition to helping your wealth make a bigger impact on society, giving away shares with unrealized capital gains is a good way of reducing your own capital gains exposure, similar to strategies like tax-loss harvesting," says Waring.
Another consideration for gifting and taxes is the opportunity to deduct gifts from your taxable income, potentially moving you into a lower tax bracket. An annual giving schedule has become tradition for many families, but the Tax Cuts and Jobs Act changed the calculation a little.
Now that the standard deduction has been increased, many families won't gain a tax-deduction benefit for annual gifts—that is, unless they are very large. To give the same amount as before, but retain most of the tax efficiency, Waring notes that it may make sense to "Brady bunch" multiple years of gifting into a single year, helping to make it worth itemizing your taxes to claim the deduction from your income.
A donor-advised fund (DAF) can be a powerful tool for making annual gifts to charities under the new rules. Families can gift appreciated securities to the DAF and then reinvest the donation, so that the donation has a chance to grow before it's ultimately donated in a future year. In the example above, the family could give 50 shares of Company X this year, getting credit for a $50,000 donation (50 shares times $1,000 a share valuation) on this year's taxes, which could possibly grow even more before it is ultimately given to the family's preferred charities.
Speak with your advisor and accountant to understand how these strategies fit into your tax situation and to determine which of your assets should be earmarked for meeting your philanthropic goals. If you're thinking about donating, late summer and early fall are ideal times to discuss this strategy with your advisor. The donation to your DAF—or direct to your preferred charity—will apply to the current tax year as long as it clears by December 31.
Consider your personal charitable goals
For many, it's a source of pride to donate to your favorite causes and institutions, and make a real financial difference. After all, you've worked hard for many years to create a good life for you, your family and loved ones.
Many choose to delay their largest gifts until they die, but Waring emphasizes the emotional benefit of giving throughout your lifetime: "One of the benefits of philanthropy is to see the positive impact we can have on society—and we can only enjoy this when we're still around to enjoy the outcome."
There are many ways to make an impact in the world, and donating stocks is one of them. Use the mentioned strategies to help reduce your tax burden while giving more to the causes and institutions close to your heart.