Are You Charitably Inclined And Interested In Making Your Donation To A Qualified Charity More Tax Efficient?

In-kind donations may be something for you to consider…Do you have positions in your portfolio that have long-term capital gains (held for over 12 months) and do you make donations of size to qualified charities? If so, you might want to consider this strategy. I suggest only doing this for donations of over $1k…larger is better because it takes some work to implement this strategy and writing a check to a charity is much easier but may not be as tax efficient.

Here’s the strategy: gift long-term appreciated taxable positions (stocks, mutual funds, bonds and possibly land could be gifted too) rather than giving cash when making donations to qualified charities, get a tax deduction, eliminate an unrealized gain in your portfolio.

Let me give you a real-life example: Let’s say you want to give $10k to a qualified charity & you own Apple stock with an unrealized long-term gain. You own 50 shares of AAPL, you bought the stock at $20 & it’s now worth $200, which gives you a current value of this position of $10k and an unrealized long-term gain of $9k. You love your Apple stock and still want to own it, but you also love your charity and want to make a gift of $10k. You have the cash to make the donation: do you give cash or the appreciated Apple stock. What do you do?

Well, as long as your qualified charity will accept Apple stock, you can gift the charity 50 shares of your Apple stock as a charitable donation. If you use this method of gifting, you don’t want to sell the stock, but rather make a donation of the stock in-kind to the charity. As long as the charity accepts the stock, your donation will be the value of the stock on the day of your gift. The charity gets your $10k gift, you get a tax deduction of $10k and you just eliminated a gain in your portfolio.

To totally take advantage of all the benefits of this strategy, you should also consider repurchasing the AAPL stock. This will give you a new cost basis of the AAPL shares. Essentially, you will have a stepped-up cost basis on the shares you repurchased. If the stock continues to rise, this will lessen the taxes if you go to sell the stock in the future and if the stock declines you can possibly sell the stock to realize a loss. Buying the stock back will not only reset your cost basis, but it will also reset your date of purchase. The date of purchase is important because if you ever wanted to implement this strategy in the future, you will need to hold the position for more than one year to establish long-term capital gain treatment. To potentially, qualify for a fair market charitable contribution deduction, the contributed asset must be a long- term capital gain asset (held more than one year).

Donation in Kind FAQs

This is not an all or nothing strategy. You can give some or all of your shares. You will not be able to give an exact dollar amount to the charity. The value of the stock is always changing so you have to accept that the value of your gift will be in the ballpark or an approximation of your desired value. If you need to give an exact amount because you are on a nonprofit board, you may have to make up the difference with cash if the stock goes down in value or be okay with giving a little more if the stock goes up in value.

The higher your tax bracket the better off this giving strategy is for you. Assuming you have held the stock for over a year and qualify for long-term capital gains, the current max long-term tax as of 2023 is 20% (some investors may also be subject to an additional 3.8% net investment income tax, which would make the highest potential federal tax on long-term gains at 23.8%).

This does not include your state tax (which can be high if you live in a high tax state like California or New York). If you are in a low tax bracket, the taxes to sell your appreciated stock could possibly be 0%, and thus not as beneficial. That said, even in a lower tax bracket you can establish a new stepped-up-cost-basis, which could potentially reduce taxes in the future if your tax situation changes.

For donations of long-term capital gain appreciated securities, your potential tax deduction is limited to 30% of your Adjusted Gross Income for contributions to public charities, donor advised funds, etc. Amounts greater than the gift year’s charitable deduction amount can be carried forward up to the next 5 years allowing for potential future tax deductions.

How to donate: This is done by obtaining instructions from your charity. They will have to have a brokerage account open for you to transfer shares to and provide you with their brokerage firms DTC information. I have helped clients do these transfers to small charities and it can take a while…maybe better off donating cash? In one instance, the charity was very small and didn’t have a brokerage account. It took the charity 2 months to open a brokerage account, which was very inconvenient.

The bottom line: I think gifting long-term appreciated stock to qualified charities should be on the mind of every philanthropically minded investor for the following reasons.

1. The charity receives the value of the position gifted
2. The charity can liquidate the position without any taxes
3. The donor will receive a tax deduction of the value of the gifted position
4. The donor eliminates an unrealized long-term gain in their portfolio which would likely reduce future taxes
5. The donor could repurchase into the position gifted to the charity and establish a new cost basis, which could potentially lessen taxes in the future and could also potentially create a tax deduction if the stock goes down in value from the repurchase date and the position is sold creating a capital repurchase. There is no waiting period for this type of transaction.
6. If you choose to repurchase the position after it has been gifted to a qualified charity, you will not only reestablish a new cost basis, but also a new purchase date, which will require you to hold the position for more than one year if you would like to receive the benefits of long-term gain tax treatment.

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