Donate stock to charity to seek bigger tax savings

Investors may be able to make a greater impact with their charity and save more on taxes by donating stock instead of cash. Be sure to get the most bang for your charitable buck.

Don’t leave money on the table

Donating to charity feels good. So does the tax deduction. It’s not surprising that nearly 65% of high-income taxpayers donate cash to charity. But fewer than 10% donate marketable securities,¹ which is surprising given the additional tax advantages of donating long-term appreciated securities (i.e., those held more than one year²) versus cash in certain scenarios.

With proper planning, when you donate long-term appreciated securities to a qualified charity, the fair market value is deducted from your taxable income and neither you nor the charity will be taxed on the capital gain. Therefore, you can potentially make a bigger impact with your charitable donation by gifting your stocks rather than liquidating them and gifting the cash that remains after you’ve paid up to 23.8% in federal capital gains tax.³

Give yourself the gift of lower taxes

There are two ways to reduce your tax costs through securities donations. Note that publicly traded stock is typically easy to value, transfer, and widely accepted by nonprofits compared to more complex or illiquid assets.

Reset the cost basis of your star performers. Maximize your savings on capital gains taxes by donating your strongest performing stocks. The cash you would have donated can instead be used to replenish your portfolio by purchasing the same security (or a similar exposure). Because the stock has appreciated since your original purchase, your new cost basis will be higher, reducing your future taxable gain.

Revive tax loss-harvesting accounts. Active tax management that involves systematic tax-loss harvesting while retaining positions that, if sold, would produce sizable taxable gains can lead to situations where a portfolio has very highly appreciated, low cost basis tax lots. Donating these lots and replenishing the shares at a higher cost basis creates the potential to harvest additional tax losses to offset gains in future years.

Rebalance for a cause. When your portfolio has drifted from its target allocation, it’s time for rebalancing, which is a great time to think about your favorite charities. As you trim outsized exposures, consider donating your lower cost-basis long-term holdings as this will reduce the tax impact of rebalancing.

Know your limits

As a charitable investor, you may consider maximizing the benefit of your charitable contributions as a part of your annual tax planning. This requires an understanding of the charitable deduction limits for the current year, keeping in mind that tax laws change from time to time.

Deduction limits vary depending on whether you itemize deductions on your federal tax return, what type of charitable entity⁴ you donate to, and whether you donate cash or some other type of asset.⁵ For simplicity, assume a client plans to itemize deductions and plans to make contributions to public charities in the forms of cash and appreciated securities that have been held more than one year.

If you make all of your donations in cash, the maximum amount that you may deduct against your taxable income is 60% of your adjusted gross income (AGI). If you donate securities instead of cash, you may deduct up to 30% of your AGI. Pretty simple so far, right? 

Now, what if you want to donate a combination of both cash and securities? For this scenario, the rule maintains the limit for cash donations at 60% of AGI but limits the deduction for securities donations to the lesser of 30% of AGI or 50% of AGI minus the amount of cash that is deducted. If you work through the math, you will conclude that when you donate a combination of cash and securities, the maximum amount you can deduct is 50% of AGI. If the securities you donate have appreciated significantly, not having to pay taxes on the appreciation can increase your tax savings above the savings derived from donating only cash up to the 60% of AGI limitation.

Strategize to maximize your tax benefit

The greater the portion of charitable contributions that are comprised of eligible, appreciated securities versus cash, the greater the tax benefit might be. Therefore, if you plan to make donations to public charities totaling up to 30% of your AGI this year, consider making those donations entirely in the form of securities. If you plan to donate between 30% and 50% of your AGI, consider donating 30% of AGI in the form of securities and the remainder in cash.

Achieve more tax savings by donating securities

This is not to say that donating only cash in order to be eligible for the higher deduction limit of 60% of AGI is necessarily tax inefficient. If the stocks you are considering for donation have appreciated only minimally, it is possible that the capital gains tax savings may not compensate for the incrementally higher deduction that is permitted for all-cash donations. A tax professional can help you determine the most tax-efficient strategy for your circumstances.

Excess contributions? Keep calm and carry forward.

If your donations exceed the deduction limits in any given year, you can carry the excess forward. Put simply, you can apply the excess amount as a deduction against your AGI in a future tax year. But of course, there are some rules:

• You can carry forward excess charitable contributions for up to five years.
• You must first deduct the contributions you made in the current year before applying amounts carried over from prior years.
• If you accumulate carryover contributions from multiple years, you must apply them chronologically, beginning with the earliest year. You can think of it as a “first-in, first-out” methodology.
• The current-year deduction limits always apply. In other words, any excess contributions that you have carried over from previous years will be subject to the limits in effect for the year in which you apply the deduction on your tax filing, not the year in which you made the donation.

The bottom line

• Donating long-term appreciated securities to public charities may provide additional tax savings versus cash contributions for some investors.
• Donating your stronger performing holdings may increase your savings on capital gain taxes and create the potential for future tax loss-harvesting opportunities.
• Donating outsized exposures may reduce the tax impact of your portfolio rebalances.
• Be aware of the current charitable deduction limits and plan your giving for the year ahead to maximize the tax benefits of your contributions.
• There is no one-size-fits-all approach. A tax-conscious advisor can help investors fulfill their charitable inclinations while taking advantage of opportunities to achieve greater tax savings.

If you are a financial professional, ask your BlackRock representative about the benefits of partnering with BlackRock and Aperio as you build and manage portfolios that reflect your clients’ unique considerations