Gifting Stock: Planning For Smart Generosity
“For it is in giving that we receive.”
― Francis of Assisi
“Be practical as well as generous in your ideals. Keep your eyes on the stars, but remember to keep your feet on the ground.”
― Theodore Roosevelt
I can think of no better way to begin this blog than with a discussion on being smart about being generous. There are few areas that I get as excited to talk about as the tax benefits of giving away equity. If you regularly give cash to a charity, and have appreciated stock in your taxable brokerage accounts, I have an alternative for you to consider. Before you write your next gift check, mull over the following.
How Giving Away Appreciated Stock Works
Most people know that when we give cash to a charity we get to deduct that amount from our taxable income. But did you know that when we give away stock that we've held for over a year we can deduct the fair market value of the stock just like cash? On the other hand, if we sell that appreciated stock we have to pay taxes on the difference between what it was worth when we acquired it (our basis), and what it's worth when we sell it (its fair market value). For most of us this tax rate is 15 or 20%. Skipping the sale of the stock and giving it directly allows us to bypass the tax.
If I bought a bunch of stock, or received RSUs worth $10,000 three years ago, and it's now worth $30,000, when I sell it I have to give the IRS $3,000 ($30,000- $10,000 = $20,000) x 15% = $3,000 assuming I'm in the 15% long-term capital gains tax bracket). If instead, I give the stock directly to the charity and let them sell it I get to write off the entire $30,000 as a gift, and they get to keep the entire $30,000. Nice win right?
Ideal Candidates For Your Equity Gift
Which stock makes for the ideal candidate for gifting?
1) Equity that has grown in value by a large amount. Since you pay capital gains tax on the difference between your basis (what it was worth when your ownership began), and what it's worth now, gifting the highly appreciated stock allows you to skip what might be a hefty tax bill.
2) Equity that you own a lot of. Gifting can be a nice re-balancing tool. If your portfolio is way out of balance because you have been receiving Facebook RSU's for the last 5 years at work while it has skyrocketed in price, now might be a great time to give some of it away. Again the oldest stock probably has the lowest basis and should be the primary candidate for your gift.
3) Equity for which the basis is lost. If you've transferred your assets between brokerage accounts, or just are unable to retrieve your original cost basis the IRS sees your equity as having a $0 basis. The IRS counts every bit of value as gain. Yikes! Bypassing the bill through gifting can ease the headache of lost basis.
Here's another example, which will hopefully help clarify things further.
Say you are thinking about writing a gift to your favorite non-profit. If you are in the 15% tax bracket and you give away $10,000 of stock with basis of $6,000 you'll save yourself ($4,000 x0.15=) $600 in taxes. Going even further, if the basis is 0, you'll save a full $1,500. If you're in the 20% capital gains bracket and also subject to the 3.8% Net Investment Income Tax (if you make over a certain threshold) you could save a whopping $2,380 on a $10,000 gift. The IRS really does smile on generosity. So why not go with it?
Clearly, giving away stock with lost basis, or equity that has a very low basis can be a great candidate for gifting.
How To Give
Finally, how do I gift? It actually is pretty easy. Contact the charity you are interested in donating to and ask them if they are accept equity gifts. If so, they will provide you with instructions and some information including their account numbers and instructions on receiving a receipt for the gift. As an example, check out the Red Cross page on donating stock here.
Then, check in with your financial planner or brokerage custodian and authorize them to coordinate the transfer.
A Few Caveats
If you give away stock you've owned for a year or less, it doesn't matter how much it's appreciated you only get to deduct what you paid for it.
When donating appreciated stock, you can only deduct up to 30% of your adjusted gross income every year for tax purposes. You can carry forward the excess deduction and use it sometime in the next five years. A good tax preparer will make sure they keep track of this for you, but you should check every year that your carryover is tracked correctly.
Before you give away the stock, check with the charity to make sure that it qualifies. Certain organizations (including private foundations) are subject to unique tax rules.