Tax-Smart Giving Using Appreciated Securities

Laird W. Green Wealth Planning

Are you planning to make a gift to a non-profit organization? Do you frequently sell and realize capital gains on your investments? Does your portfolio need rebalancing to your portfolio targets for growth due to the recent bull market? If so, you may be an ideal candidate to gift shares of appreciated securities directly to a qualified 501(c)(3) non-profit organization. The process is simple:

  • You gift the shares to the non-profit organization’s brokerage account.
  • The non-profit organization sells your shares and, as a non-profit, does not pay the capital gains tax on the transaction.
  • The non-profit organization sends you a charitable verification statement reflecting the value of your gift, which you report on your income tax return as a charitable deduction.

An example might be helpful to understanding the advantages of this strategy for you and your pocketbook. Let’s assume you wish to make a gift of $5,000. You also are planning to sell shares of a stock or mutual fund that have grown substantially, and you want to trim your ownership. You purchased the shares several years ago for $1,000 and the current value is $5,000, which translates to a potential capital gain of $4,000. This chart compares selling the shares in your brokerage account and donating cash to the non-profit organization versus donating the shares to the non-profit organization.

Under both scenarios, you will have a transaction for tax purposes of the fair market value of your shares of $5,000. Assuming your capital gains tax rate is 20%, your state capital gains rate is 3.92%, and you are subject to the 2.9% ACA tax. You would have to pay the following tax:

Tax on Capital Gains
Sell Shares, Donate CashDonate Shares to Charity
Proceeds of Dispositon$5,000$5,000
Cost of Shares(1,000)(1,000)
Capital Gain$4,000$4,000
Taxable Portion of Gain at 26.82%$1,072$0

By gifting your shares directly to the non-profit organization rather than selling the shares and donating cash, you save $1,072 in taxes. A gift to the non-profit organization and a tax savings to you. You might also qualify for a charitable deduction on the gift if you have deductions in excess of the standard deduction of $12,550 for single taxpayers and $25,100 for joint filers.

And, finally, if you are gifting an investment that has appreciated but you think has additional long-term appreciation potential, rebuy those shares with the cash you had planned to donate and start the income tax clock back to zero!

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