Retirement Investor

Embracing Stock Donations in the New Year

Share

Investors have been trained to think that the end of the year is the best time to strategize for tax-savings. However, the benefits of stock gifting make it something donors and NPOs should think about year-round. Many investors aren’t aware that by donating appreciated stock to charities, schools, and faith- or community-based organizations, they can avoid capital gains tax while making larger pre-tax gifts to the causes they care about.

While cash has been the go-to form of charitable giving, charitable stock gifting has always offered significant advantages over cash but has largely been ignored. In 2018 less than 0.5% of investors claimed deductions for charitable stock gifts. However, recent changes have made charitable stock donations more desirable for both nonprofits and donors for four primary reasons: 

  1. A 10+ year bull market has created enormous wealth for millions of households 
  2. Markets remain near all-time highs, despite the recent pullback
  3. The pandemic has forced nonprofits to seek new sources of funding, and appreciated stock represents $100 billion in potential funding 
  4. The process of donating stock to charity has become fast and easy on sites like Donatestock.com

Not sure where to go from here? I’ve broken down three things you need to know to boost your tax savings and have the greatest influence when it comes to charitable gifting.  

1.) Stock donations vs. cash donations

Provided you’ve held onto stock shares for 12 months, by donating appreciated stock to charity, you can avoid capital gains tax while also deducting the fair market value of the donation! 

Stock donating not only puts money back in your pocket, but it’s also better for charity. In principle, stock represents a discretionary source of giving. Donating stock over cash allows you to transfer assets from the IRS to the charity of your choice. Because charitable stock gifts represent pre-tax donations of discretionary assets, stock gifts are generally much larger than cash. 

2.) Which stocks are best to donate?

When deciding which stocks to donate, you want to consider three things: The need to harvest gains, the greatest tax saving opportunities, and stock concentration. 

Let’s start with harvesting gains. Say you’ve owned GameStop or Tesla for several years. Both have exploded in value with GME up almost 3000% and TSLA up 600% in the last two years. Both would be good stocks to sell, but then you’d incur a tax on the capital gains – which would be steep (especially if you live in California, New Jersey, New York, or Connecticut where the states also tax capital gains 3-13%). This makes them ripe for donating as you can avoid capital gains tax while deducting the full value of the stock. It’s really a no-brainer. 

Next, if you are not lucky enough to own some of these recent rocket stocks, look at your biggest all-time winners. Personally, I’ve owned AAPL since 2013, when it was worth $16 on a split-adjusted basis. As I write this, AAPL is at $170 per share, a gain of more than 1000%. That makes it an obvious choice based on long-term gains – the bigger the gain, the bigger the tax savings. 

Lastly, look at where you have the highest concentration of stock ownership. If you’ve had big gains in one or two stocks, you likely now have a problem of too much concentration in those one to two positions. If the gains and tax savings are equal (or close to it), donate the stock that will help you reduce portfolio risk.  

3.) When is the best time to donate stock?

Stock donations are best when done after a big run and when you would like to collect gains. Moderna (MRNA) was a high-flier in 2021 and in September, 2021, it hit $450. The time to donate MRNA was last fall. Since then, it’s fallen by more than 60%. The same goes for Zoom, Peloton, Docusign, Zillow and countless others. If you own a hot stock, harvest your gains while avoiding taxes by donating it to a cause you love. 

For retirees, appreciated stock represents a great tool for avoiding taxes on required minimum distributions. Starting at age 72 the IRS requires that you distribute funds from your IRA – these distributions are taxed as personal income. If you donate stock from your IRA, you can deduct the donation from your taxable distribution, thereby reducing your tax bill. Because the IRA assets grew tax-free, there is no capital gains tax to be avoided, but you can avoid some taxes (legally) by donating funds to organizations in need.  

Regardless of your age, charitable stock donations are a win-win for investors and the nonprofits they support. And now that it’s fast, safe, and free to donate stock, it’s easy and convenient to harvest gains, reduce your taxes and make the world a better place. To learn more about how we’re seeking to transform charitable giving, please visit Donatestock.com.

Tags:
Steve Latham

Steve Latham is the founder and chairman of Donatestock.com. Steve is a Harvard MBA and a serial entrepreneur with three decades of experience in starting and growing innovative technology companies in finance, marketing and data analytics.

  • 1

Leave a Comment

Your email address will not be published. Required fields are marked *