Giving to a charity that benefits a cause that’s close to your heart is rewarding. Getting a tax break for your generosity can make it even more gratifying—even more so than you may realize. What if you could add more than 20% to your charitable contribution and maximize your tax savings by taking advantage of an often-overlooked tax provision?
Here’s how: The federal tax code allows you to contribute appreciated securities—such as stocks, bonds, mutual fund shares—directly to a charity without paying capital gains tax, as you would if you sold it first and then contributed cash to the charity. And that’s not all. When you add up your itemized tax deductions for the year, you can generally deduct the fair market value of the long-term security at the time of the donation, not the lower amount you paid for it originally.
“It’s one of the most advantageous tax strategies available to people who make charitable giving part of their financial plan,” says Jacqueline Valouch, vice president and charitable planning consultant with Fidelity Charitable®, an independent public charity. “It allows you to get a bigger bang for your buck and align your charitable giving with your other financial strategies.”
Eliminate capital gains taxes
Contributing long-term appreciated assets to a charity can be a highly effective tax strategy for eliminating capital gains taxes, especially for people with investments that have increased significantly in value.
Consider a hypothetical example. Suppose you purchased $20,000 worth of stock in a company 20 years ago. Today those shares are worth $50,000, meaning a $30,000 taxable long-term capital gain. The chart compares donating the stock directly to charity versus selling the security and donating the proceeds to charity. The bottom line: By donating the stock, you eliminate a $7,140 long-term capital gain and Medicare tax on the $30,000 increase in the stock’s value.
The more your security has appreciated and the higher your long-term capital gains tax rate, the more beneficial this strategy becomes. But even if your adjusted gross income puts you at the 15% tax rate for long-term capital gains, you could still eliminate a substantial amount of tax by contributing a long-term appreciated security directly in kind to a charity instead of selling it first and then making the donation.
Increase the amount you can contribute—and deduct
While the capital gains tax elimination is substantial, it’s only part of the story. Another positive effect of contributing long-term appreciated securities to charity is that it allows you to contribute more to a charity while benefiting from a tax deduction for the charitable gift. Of course, you need to itemize to take advantage of the deduction.1
People who sell investments to make their annual charitable contribution will often set aside a portion of the proceeds from the sale to pay the capital gains tax bill. Or, if they have decided to donate a certain amount, they may need to sell extra shares of an investment to cover the tax cost in addition to the contribution.
Not only does a direct contribution of a long-term appreciated security enable you to eliminate the capital gains tax bill, it may also offer the additional benefit of increasing the size of your itemized tax deduction. You are generally allowed to calculate your charitable tax deduction based on the fair market value, not the cost basis, of the long-term appreciated security.
Using the hypothetical example above and in the chart to illustrate this point, the total income taxes you could save by contributing your long-term appreciated security in kind directly to charity would be $19,800. That’s more than double the $9,833 you would save if you sold the investment and contributed cash.
Find the right asset to give
To maximize the value of the strategy, Valouch suggests that you look for securities to contribute that have increased the most in value and that you have held for more than a year. To see the impact of contributing securities with various levels of appreciation, you can use Fidelity Charitable’s securities donation calculator.
The calculator allows you to enter the size of your proposed contribution, its cost basis, and your capital gains and marginal tax rates to arrive at a savings figure that includes both the capital gains tax savings and the tax reduction from the higher itemized charitable deduction.
Rebalance your portfolio
Many savvy investors typically perform an annual or semiannual portfolio rebalancing to ensure that their investment mix remains in line with their goals.
Disciplined portfolio rebalancing supports the practice of selling investments that have done well and buying those that may be undervalued—the buy-low-sell-high adage of successful investing. One downside of rebalancing is that it often generates capital gains taxes. But aligning your portfolio rebalancing with your charitable giving can help make that less of an issue.
Instead of selling an appreciated security and using the cash to purchase an investment in an underperforming category, you could use the appreciated security to make your annual charitable contribution. Then, you could take the cash you would have normally given to charity and invest it in securities that rebalance your portfolio. Result: two goals accomplished and a lower tax bill to boot.
Simplify your giving
Donating long-term appreciated securities is a smart tax strategy, but if you want to support many different charities with this type of donation, it may become time consuming. You can simplify the process by using a single contribution of long-term securities to create a giving plan and support multiple charities with a donor-advised fund (DAF), which is a program at a public charity. You make a tax-deductible charitable contribution to the charity that sponsors the DAF. Then you can recommend grants from your DAF to qualified public charities. You can also invest your charitable dollars for potential tax-free growth and generate even more money to support the charitable causes you care about.
Using our hypothetical example above, if you don’t want to give your entire $50,000 worth of stock to one charity, you could simply contribute it to the sponsoring organization of your DAF and recommend grants to multiple charities. The tax-savings benefit for you remains the same, but the process is simpler for you—and the charity.
Break the check habit
With all the potential benefits of contributing long-term appreciated securities, why don’t more people take advantage of the strategy?
“Mostly it comes down to habit,” Valouch notes. “Many people who contribute to charity on a regular basis have always written checks, so that seems to them to be the easiest way to go. But the fact is that contributing long-term appreciated securities doesn’t require much additional effort, especially if you do it with a donor-advised fund, and the tax savings can be really significant for you as well as beneficial to the charities you support.”
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Fidelity Charitable® is the brand name for Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license.
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