Affluent investors who are philanthropic-minded have only 11 days left this year to score the wallet-boosting tax perks of donating to a nonprofit. But relatively few big earners seem to know that giving stock is immediately more valuable than sending cash, both for the donor and for the charity.
Investors who give appreciated shares after holding onto them for at least one year don’t owe federal capital gains tax, now as high as 23.8%, or any state levies on the profits. Neither do the charities. Best of all, donors can write off on their federal returns the full fair market value of the donated securities, not just what they paid. The deduction reduces taxable income, which decreases the amount of money an investor sends to the IRS that year.
For a taxpayer in the 37% federal bracket, giving away $10,000 worth of Moderna stock that cost only $3,000 a year ago means $3,700 in tax savings. The savings appear as a reduction to the total income on which she owes taxes to the IRS that year.
Compare that to what happens if the same investor instead makes her donation by selling $10,000 in appreciated stock and writing a check to her chosen charity for the proceeds. She will owe $1,666 in federal capital gains tax on the gains, plus more if she lives in one of the 41
That’s significantly less value for the nonprofit. But it’s also less of a benefit for the donor. In her bracket, the gift translates into a deduction worth just over $2,700 — $1,000 less compared to the scenario above. And because she has to shell out capital gains taxes in the process, the total cost to her is even greater. Subtract those owed taxes (a cost) from her deduction (a benefit), and she can wind up with a deduction whose ultimate value is far smaller.
Taking chips off the table
It’s one of the rare instances in which cash is not king. “It’s a great personal finance secret,” said Steve Latham, the co-founder and chairman of donatestock.com, an online giving service. “There’s no reason to donate cash.”
So why do so few well-to-do people donate stock and instead opt to write a check or tap their credit cards?
For 2018, just under 172,000 individual taxpayers, out of a total of more than 153 million, donated $42.7 billion worth of corporate stock, mutual funds and “other investments,” not including real estate or tangible goods, according to the most recent IRS
Around 8.6 million individual taxpayers who made at least $200,000 filed returns in 2018, but barely 2% of that group claimed a deduction for donating stock. It’s unknown how many people sell securities and donate the proceeds to charity, as that’s something the IRS can’t track.
Charitable giving is marketed as a wealth management tool. But many investors and advisors simply don’t know the rules, Latham said, and think that if they instruct their broker to sell stock and send the proceeds to a nonprofit, they get a deduction for the full value of the shares. They don’t. Another hurdle: Many charitable organizations aren’t set up to receive stock and instead are focused on cash.
The calculus is different when it comes to shares that have lost value. Giving them to charity deprives the donor of the ability to deduct up to $3,000 in losses each year to offset gains in other securities. Losses over that amount can be deducted in future years. But all is not lost with investment oinkers.
“If the stock has lost value, it’s better to sell the stock first and give the cash to the charity,” The Campaign for Drexel, a fundraising unit of the university,
Donating stock instead of cash makes sense only for the charitable-minded who are willing to give something away. Investors interested only in raking in the most dollars would be better off simply selling the $10,000 in Moderna shares, paying the capital gains taxes and banking the proceeds. After all, our California investor in that scenario would pocket a net $7,400, twice as much as the value of her deduction.
But
Not just magnanimous concern for social, cultural, educational and environmental causes is at work. Donating stock is also a way for wealthy investors with big paper profits but not a lot of taxable income to reduce concentrated stock positions in their retirement portfolios without incurring tax bills. With stock markets booming — the S&P 500 is up nearly 97% since 2019 — “people are sitting on huge gains and asking, ‘how do I take chips off the table?’” Latham said.
Timothy Speiss, a tax partner in the personal wealth advisors group at accounting firm EisnerAmper, calls the stock donation strategy the “asset allocation model” of philanthropy, especially for investors who are rich on paper with relatively lesser income: “We’ve seen a lot of this. A $300,000 FMV (fair market value) deduction is a heckuva lot better than writing a check for $300,000.”
Big gifts are made by people whose deductions, including the $10,000 one for state and local taxes, including property levies, exceed the standard deduction, now $12,550 ($25,100 for couples). The vast majority of taxpayers,
But this year, they can still get a write-off for donations, albeit far smaller than those in our examples above. As part of its pandemic relief, Congress authorized the IRS to allow taxpayers who don’t itemize deductions to deduct
A second pandemic-related change for 2020 and 2021 allows taxpayers to make cash donations (not to donor-advised funds) that translate into deductions of up to
That offer doesn’t appear popular with some advisors, however. Said Speiss: “I’ve never seen someone zero out their income with a charitable contribution.”
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