Donating Appreciated Securities: A Tax-Savvy Strategy for Giving

If you’re looking for a tax-savvy way to give to charity, consider donating appreciated securities instead of cash. Not only can this strategy benefit your favorite organizations, but it can also provide you with significant tax advantages.

What are Appreciated Securities?

Appreciated securities are assets that have increased in value since you acquired them. These can include stocks, mutual funds, and exchange-traded funds (ETFs). For example, if you purchased stock for $1,000 and it’s now worth $5,000, you have $4,000 in appreciation.

Why Donate Appreciated Securities?

When you donate appreciated securities to a qualified charitable organization, you can receive two key tax benefits:

1. Charitable deduction: You can deduct the full fair market value of the donated securities from your taxable income, up to 30% of your adjusted gross income (AGI) in the year of the gift. Any excess can be carried forward for up to five years.
2. Capital gains tax avoidance: If you were to sell the securities and then donate the proceeds, you would have to pay capital gains tax on the appreciation. However, if you donate the securities directly to the charity, you can avoid paying capital gains tax altogether.

For example, let’s say you own stock worth $10,000 that you purchased for $2,000. If you sell the stock and donate the proceeds, you’ll owe capital gains tax on the $8,000 in appreciation. Assuming a capital gains tax rate of 20%, you’ll owe $1,600 in taxes. However, if you donate the stock directly to the charity, you can avoid paying this tax.

It’s worth noting that the charity doesn’t have to pay capital gains tax either when it sells the securities, as they are tax-exempt organizations.

Which Organizations Qualify for Donations?

To receive the tax benefits of donating appreciated securities, you must donate them to a qualified charitable organization. These can include:

1. Public charities: These are organizations that are recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code. This includes religious organizations, educational institutions, and organizations that focus on health, science, or the arts.
2. Private foundations: These are organizations that are established and funded by individuals, families, or corporations. They must distribute at least 5% of their assets each year to qualified charities.
3. Donor-advised funds: These are funds that are established and managed by public charities. Donors can make contributions to the fund and then recommend grants to other charitable organizations.

It’s important to ensure that the organization you’re donating to is a qualified charity, as not all organizations are eligible for tax-deductible contributions.

How to Donate Appreciated Securities

Donating appreciated securities is a straightforward process that involves transferring the securities from your brokerage account to the charity’s brokerage account. Here are the steps:

1. Contact the charity: Let them know that you’re interested in donating appreciated securities and ask for their brokerage account information.
2. Contact your broker: Provide them with the charity’s brokerage account information and instruct them to transfer the securities.
3. Complete the necessary forms: You’ll need to fill out a transfer form provided by your broker. This will include the details of the securities you’re donating and the charity’s brokerage account information.
4. Confirm the transfer: Once the transfer is complete, follow up with the charity to ensure they received the securities.

It’s important to start this process early, as it can take several days or even weeks to complete the transfer.

Other Considerations

While donating appreciated securities can be a tax-savvy strategy, there are a few other considerations to keep in mind:

1. Holding period: To qualify for the tax benefits of donating appreciated securities, you must have held them for at least one year. This is known as the long-term capital gains holding period.
2. Valuation: When you donate appreciated securities, you must determine their fair market value for tax purposes. This can be done using the closing price on the day of the transfer or an average of the high and low prices for the day.
3. Annual contribution limits: The amount you can deduct for charitable contributions in a given year is limited to a percentage of your AGI. For donations of appreciated securities, the limit is 30% of your AGI. Any excess can be carried forward for up to five years.
4. Non-cash contribution rules: If you donate appreciated securities worth more than $5,000, you must obtain a qualified appraisal and attach it to your tax return.
5. Alternative minimum tax (AMT): If you’re subject to the AMT, your charitable deduction may be limited. Consult with your tax advisor to determine your specific situation.

In summary, donating appreciated securities to qualified charitable organizations can provide significant tax benefits while supporting the causes you care about. It’s important to ensure that the organization you’re donating to is a qualified charity and that you’ve held the securities for at least one year. Consult with your tax advisor to determine how this strategy may fit into your overall financial plan. With a little planning and attention to detail, you can make a meaningful impact on the causes you care about while taking advantage of tax savings.

If you’re interested in incorporating donating appreciated securities into your charitable giving strategy, Johnson Financial Advisors can help. Our team of financial professionals has the expertise to guide you through the process and ensure that you maximize your tax benefits while supporting the causes you care about. Contact us today to learn more and start building a giving plan that aligns with your values.

*Johnson Financial Advisors does not provide tax advice. Please contact your CPA for tax specific guidance.