Travis Russell

Travis Russell, CFP®

Travis employs many of the disciplines of success that he learned as a Division 1 hockey player – namely, persistence, practice, and a having passion for what you do – to his role as Principal and Client Advisor.

As the holidays approach, thoughts about giving turn to action for many of us. Before writing a check to your favorite charity, consider the tax advantages of gifting appreciated assets, like stock, instead.

The soaring U.S. stock market of the past few years has been great for portfolios; however, taxes will need to be paid on any realized gains. If you are philanthropic or gift an annual amount to a charity, it may make more sense to use those appreciated assets in your portfolio to support those causes.

You can donate almost any appreciated security held for longer than one year within a taxable brokerage account and receive the same tax deduction you would get if you donated cash. (There are some restrictions summarized below.) You save because there are no capital gains realized when you gift the security.

Here’s how gifting appreciated assets works:

John & Jane Smith are generous supporters of the American Heart Association and donate $100,000 to them each year.

They own appreciated shares of Apple stock (ticker: AAPL) with a market value of $100,000 and a cost basis of $5,000. The stock is owned in their joint investment account and has been held for 10 years.

Option 1: They sell the shares and donate the cash.

Assuming a 20% federal capital gains tax and 3.8% Medicare net investment income surtax, the Smith’s would owe $22,610 in tax when they file their return. They would receive a deduction of $100,000 for their cash donation.

Option 2: Donate their Apple stock directly from their investment account to the American Heart Association.

The Smiths still receive the full $100,000 deduction, but in this case, no capital gains tax is due. That’s a $22,610 savings while accomplishing the same objective!

Note: Almost all charities and organizations will be able to provide you with transfer instructions for securities. This analysis does not take into consideration state capital gains taxes.

Limitations on charitable deductions:

There are limitations to the amount an individual or couple can deduct from their adjusted gross income (AGI) for their charitable gifts in each calendar year. Below is a summary that applies:

Gifting Limits Table 2

Keep in mind, if your charitable gifts exceed these limits in a calendar year, they can be carried forward for five years.

Big income year strategies:

If you have had a larger than normal income year and anticipate making annual gifts over the next several years, we generally recommend establishing a donor-advised fund (DAF) to reduce your tax hit in the high-income year.

Donor-advised funds are offered through companies like Schwab and Fidelity and eliminate many of the administration expenses and hassles of a foundation. They allow you to donate appreciated securities to the DAF and receive a tax deduction in the calendar year the gift is made. You then distribute your annual gifts in future years to qualified 501 (c) (3) charities from your DAF.

This can be useful for individuals realizing significant income or capital gains in a calendar year, from things like selling a business or completing a Roth IRA conversion.

Additionally, donor-advised funds can receive illiquid investments as well including investment properties, vacation homes, private equity investments, or even portions of a privately held company (assuming there is another buyer in place).

Learn more about donor-advised funds through Schwab Charitable.

Impact on your investment portfolio:

If you own highly appreciated securities, chances are that they may affect the balance of assets in your portfolio by over-weighting certain asset classes. We often see this with our own clients. Gifting those securities may restore your intended target allocation without suffering any tax consequences that may be caused by rebalancing your portfolio. If there is a security our client loves, we typically recommend gifting the security and then re-purchasing the stock to reset the cost basis.

Giving back is one of the most selfless and satisfying acts that anyone can do. As you set out to make a difference by making a donation, we recommend that you speak with your financial advisor first. Structured correctly, the impact you make may cost you far less.