With markets continuing to boom, many people are seeing their stocks and other securities gain value quickly. One way to best make use of that growth—and avoid tax penalties for it—is to gift appreciated securities directly to the charitable organization of your choice. It’s a great option and many simply overlook this special tax provision. Here are 5 things you should know about making a charitable donation of stock:
1. Donating stock avoids capital gains.
Gifting appreciated shares is a great way to support the causes that are most important to you while also reducing your tax burden. If you sell a stock first, then donate the proceeds, you may be subject to capital gains taxes on the proceeds. But if you donate the shares instead to an eligible charity, you will avoid paying capital gains tax as long as you have held the security for at least one year, while the organization receives the full value of the shares.
2. You get two times the tax benefit.
Along with the avoidance of penalties for capital gains, you will also be eligible to receive an income tax charitable deduction for the full market value of the shares at the time of the gift. For most donors, a gift of appreciated shares is fully deductible up to 30 percent of your adjusted gross income. Be sure to consult with your tax professional before making a gift.
3. A range of appreciated securities is eligible.
Publicly traded stock is the most obvious choice, but other securities may also be donated directly to charitable organizations, including exchange-traded funds, closely held stock, and mutual funds. Note, however, that the organization you’re giving to has to be able to accept non-cash gifts, so make sure of that before you donate.
4. It’s a great way to diversify your portfolio.
With the markets up substantially over the past few years, investors have found they may be holding too much in certain stocks or funds and need to diversify. Often, they don’t make the changes due to the capital gains taxes that would be incurred upon selling and find themselves taking on more risk than recommended. Gifting the appreciated shares allows an investor to trim their holdings and avoid the tax. A true win-win.
5. Now is a great time to do it.
Ownership transfer must be completed by the end of the year, so now is the time to make your gift in order to take advantage of the tax deduction next year. It’s a good idea to start the process at least two weeks before Dec. 31. In addition, year-end gifts are an important benchmark for most charitable organizations, so you will help your favorite charity plan to make the best use of your gift in the coming year.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
Bridgeworth, LLC does not offer tax or legal advice. Individuals should seek advice based on their own particular circumstances from an independent tax professional or attorney.
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