Stock vs Cash Holiday Gifts

Tis the season to be gifting! As we scurry to buy presents for family, we may be counting our blessings and considering gifts to those less fortunate than we are. However, giving to others may seem impossible when our wallet and credit cards are being stress-tested, not only by gifts, but also by paying off expenses to eke out year-end income tax deductions. Giving is more challenging when you’re feeling cash-strapped!  

There is a way to recognize charity that doesn’t involve depleting all of your cash. One frequently overlooked way of giving is the donation of long-term appreciated securities such as stocks, bonds, or mutual funds. Making a charitable gift of assets that have grown in value since you purchased them may give you some year-end tax deduction benefits, and you have more options to help your favorite charity, even without cash in hand.

Let’s say your university launched a capital campaign for a new theatre or rec center, and there are even naming opportunities for gifts of $25,000 or more. You would like to show that you are a devoted alumnus, but you have no cash on hand. However, you’ve been investing cash, so you have some stocks that increased in value.  For this example, let’s say you own 1,250 shares in a mutual fund at $20 per share for a total of $25,000. You would have the option of contributing and getting that naming opportunity! Your choice is to sell the stock to generate cash or donate the stock itself. The following table illustrates the potential tax savings for an individual in the highest tax bracket making a direct donation of long-term appreciated securities with a cost basis of $10,000, and long-term capital gains of $15,000.

Even though you can claim a deduction of up to 50% for cash gifts and only up to 30% of the donor’s adjusted gross income (AGI) for gifts of appreciated assets, in this example it is more beneficial to donate stock. Selling the stock to generate cash means paying capital gains tax before making the donation. If you donate the stock directly, you don’t pay tax, so the university would receive the stock at full fair market value rather than the after tax amount. Your deduction would be approximately $1,500 larger than you could if you sold the assets to make the donation.

Tax payers should consider what other deductions they made during the year to decide whether or not it may be beneficial to wait until January 1st or if they should make the donation now. However, the possibility of Tax Loss Carryforward may help. In some cases if you aren’t able to use the entire deduction in the current year, you may be eligible to carry it forward for up to seven years. If you’re planning on donating mutual funds rather than a single stock, be aware that the process may take a couple of weeks.

If you are scrambling for year-end tax deductions, but don’t want to commit to a beneficiary this year, you can consider creating a Donor-Advised Fund (DAF). A DAF may allow you to make a contribution and select a charity later. In fact, your money deductible could even accumulate within a DAF until some point in the future, even up to retirement. If you use the $25,000 from the first example and add $25,000 every year for ten years, assuming a static 7% return on assets, the value would be worth about $369,590. Moreover, based on the assumptions from the first table, you could receive approximately $10,000 in tax savings each year, or about $100,000 over the ten years.  

The accumulated dollars could help fund countless clean water projects, give microloans to entrepreneurs in developing countries to promote self-sufficiency, build a much needed cancer center, or fund any other charitable passion.

Americans have proven to be among the most generous citizens in the world. The U.S. has consistently ranked at the top of the World Giving Index charitable behavior study. Gifts of appreciated assets are another way for Americans to get more by giving more.  

Deborah Stavis is a member of the DailyWorth Connect program. Read more about the program here.

Securities offered through FSC Securities Corporation, member FINRA/SIPC. Advisory and insurance services offered through Stavis & Cohen Financial, a registered investment advisor not affiliated with FSC Securities Corporation.

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As individual situations vary, the information presented here should only be relied upon when coordinated with individual professional advice.

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither FSC Securities Corporation, nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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