Charitable Tax Planning Opportunity: Donate Appreciated Stock to Charity
For advisors with philanthropically-minded clients, publicly traded appreciated stock can be among the most tax-advantaged items to donate to charity. Contributing such assets may enable the donor to enjoy a current year tax deduction and potentially eliminate capital gains tax liability on the sale of the asset, while allowing the charities they support to receive the most money possible.
With the markets performing well, now may be a particularly good time to donate appreciated stock. While many investors may be experiencing healthy gains in their investment portfolios, they may also be facing the prospect of correspondingly higher taxes. Donating appreciated assets can help offset these higher income and capital gains taxes and allow clients to give more.
Donate Shares of Appreciated Publicly Traded Securities
Clients who are considering current year charitable contributions and are also facing long-term capital gains taxes on appreciated stock held for more than a year can realize a much more favorable income tax result and charitable impact by making a timely donation of the appreciated stock directly to charity.
If your client sells the stock first and then donates the cash proceeds to charity, the client may be subject to capital gains taxes on the proceeds from the sale of the stock. But if the client contributes appreciated stock held for more than one year directly to a public charity, the client can usually deduct the fair market value of the donation without realizing any capital gain.
Appreciated securities that can be donated to charity can take the form of publicly traded stock, ETFs, closely held stock, or mutual funds. Not all charities are able to accept these complex, non-cash gifts directly. If this applies to your client’s favorite charities, your client may consider opening a donor-advised fund account. These charitable accounts, offered by national providers and community foundations, allow donors to more easily convert appreciated investments into tax-effective charitable contributions. The donor-advised fund provider can liquidate the investment, and the cash proceeds can then be invested for potential growth and granted to charities immediately or at the donor’s convenience.
Note that donated publicly traded partnerships—in particular master limited partnerships ("MLPs")—are an important exception to the typical fair market value deduction for long-term gain securities, as the charitable deduction must be reduced by the amount of ordinary income that would have been realized if the property had been sold at fair market value on the date contributed. For MLPs with substantial accumulated depreciation, this can greatly reduce the charitable deduction. Additionally, if the partnership carries debt (often the case with MLPs), the donor may be liable for taxes.
Hypothetical Example (assuming investment has been held for more than a year)
With a direct donation to charity or a donor-advised fund account, the donor’s federal income taxes are reduced by an additional $13,960 and the charity receives $10,000 more.
Timing a Client’s Donation and Other Considerations
When advising clients about the benefits of donating appreciated stock via donor-advised fund accounts, keep the following in mind:
- In order for clients to realize the significant tax savings from the charitable donation of appreciated stock, the appreciated stock held for more than one year must be transferred directly to a donor-advised fund or to another charity. The stock should not be sold.
- Clients should not enter into any arrangement that would legally compel the recipient charity to dispose of the stock upon receipt. This kind of "pre-arranged sale" could reduce or eliminate the tax benefits to the donor of making the donation.
- In general, donor-advised fund providers control the sale process of the donated stock. Upon receipt, the securities are typically promptly sold, but the organizations may reserve the right to sell the stock at any time.
- Donating depreciated stock or appreciated stock held for one year or less does not have the same tax advantages as donating appreciated stock held for more than one year.
- Restricted stock, including stock subject to a lock-up agreement, and IPO stock can also be donated to charity.
This is the second article in a series on donating non-cash assets. For more information on this topic, see “Why Your Clients’ Investments, Not Cash, Make the Best Charitable Gifts” and stay tuned for the next article which will focus on considerations for donating restricted stock and IPO stock to charity. Visit schwabcharitable.org for additional ways to help clients have more impact with their charitable giving and maximize their tax benefits.
*This value is hypothetical, for illustrative purposes only, and does not account for possible valuation discounts due to restrictions on the shares, if any. It should not be used in connection with considering whether to buy, sell, or hold appreciated securities.
†Assumes cost basis of $5,000, that the investment has been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate. Does not take into account any state or local taxes, or potential Medicare net investment income surtax.
‡Assumes no restrictions on the sale of the contributed shares. If there are restrictions, the value of the deduction will be reduced. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor’s AGI. Charitable contributions to public charities of capital gain property held for more than one year are usually deductible at fair market values. Deductions for capital gain property held for one year or less are usually limited to cost basis.
§Assumes donor is subject to the 39.6% federal tax. Does not take into account state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor’s AGI.
