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Maybe your stocks have appreciated greatly since you purchased them. Maybe a surge in value of one of your holdings has thrown your portfolio off balance. Maybe you just want to refocus on other investment categories. If you also give to charity, these scenarios should encourage you to review your investment portfolio with a donation strategy in mind.
Why? Because donating stock directly to charity is one of the most tax-smart ways to give. Yet, it is often not well understood or widely used. According to a 2016 study by Fidelity Charitable, 80 percent of donors own appreciated assets, such as stocks, mutual funds or bonds, but only 21 percent of those donors have contributed these types of assets to charity.
Here are four reasons you should give stock donation a try:
By donating stock that has appreciated for more than a year, you are actually giving 20 percent more than if you sold the stock and then made a cash donation. The reason is simple: avoiding capital gains taxes. The maximum federal capital gains tax rate is 20 percent on long-term holdings. Given that the Dow Jones Industrial Average rose from about 13,000 at the end of August 2012 to almost 22,000 at the end of August 2017, you are likely to realize a taxable profit on the sale of assets you purchased in the past five years. But if you donate the stock directly to a charity, there’s no capital gains tax to pay. Plus, you are still eligible to deduct the full fair-market value of the asset you donated from your income taxes, up to the overall amount allowed by the IRS. And remember that your appreciated assets can also include assets that are not publicly traded, like restricted stock or bitcoin.
Many investors have stocks that they love and want to hold for the long term. Any appreciation of that stock’s value confirms your belief in it, but it can also set the stage for substantial gains when you sell. So consider donating some of your appreciated shares and then buying new shares to reset your cost basis at the current, higher price. This will reduce your future capital gains tax exposure if the stock continues to grow in value.
Even with a good diet and regular exercise, your health can get out of balance. So, too, can your stock portfolio.
Even with a good diet and regular exercise, your health can get out of balance. So, too, can your stock portfolio. If a review of your investments’ gains and losses shows that it’s time to rebalance your portfolio to maximize its performance and optimize for risk, donating stock can give your portfolio the health check it needs. Implementing a donation strategy puts your capital gains to work funding your philanthropy. Talk to your advisor about which assets to put to a better use.
“Advisors want people to understand where there are capital gains and where there are losses,” says Jaqueline Valouch, a vice president and charitable planning consultant with Fidelity Charitable. “You may need to sell things off, but maybe instead of selling you use rebalancing.”
Some people may not be interested in donating stock because they think it will require a lot of paperwork and phone calls, or that their chosen charity may not be able to easily accept a stock donation. But a donor-advised fund, like the Giving Account at Fidelity Charitable, a public charity, takes the hassle out of donating stock.
A donor-advised fund is like a charitable investment account which can be used exclusively to support charities you care about. Instead of donating multiple blocks of stock to multiple charities, you make one donation which is used to fund your Giving Account. There is one form to file with your tax return instead of many.
And if you’re not sure which charity should receive your appreciated stock, you need not decide now. Donating stock to a donor-advised fund allows you to take a deduction for the current tax year and then support as many charities as you would like over time, by recommending grants on the timetable that makes the most sense for you.
To be eligible for a charitable deduction for a tax year, donations of stock need to be received by the end of the year. Because different assets take different amounts of time to be transferred, you should initiate your transactions as early as possible.
“The point is to be efficient, effective and give more to your favorite cause,” says Valouch.