Experts suggest considering in-kind donations, especially for investments with long-term capital gains, when making donations to qualified charities. This strategy involves gifting appreciated taxable positions such as stocks, mutual funds, bonds, or land, instead of cash donations. By doing so, donors can receive a tax deduction, eliminate unrealized gains in their portfolio, and potentially repurchase the gifted assets to establish a new cost basis.
In a real-life example, if an individual wants to donate $10,000 to a charity and owns Apple stock with an unrealized long-term gain, they could gift the stock to the charity instead of cash. By donating the stock in-kind, the charity receives the value of the stock, the donor gets a tax deduction equal to the value of the stock, and the unrealized gain in the portfolio is eliminated. Additionally, repurchasing the stock can help reset the cost basis and date of purchase, potentially reducing future taxes if the stock continues to rise.
This strategy is particularly beneficial for individuals in higher tax brackets as the potential tax deduction is limited to 30% of Adjusted Gross Income for contributions to public charities. The maximum long-term federal tax rate is 20%, plus an additional 3.8% net investment income tax for some investors. However, individuals in lower tax brackets may not benefit as much from this strategy, as the taxes on appreciated stock sales could be lower. Still, establishing a new cost basis could potentially reduce future taxes if the tax situation changes.
Donors should keep in mind that this strategy is not an all-or-nothing approach and the value of the donated stock may vary. It is important to follow the instructions provided by the charity to transfer the shares to their brokerage account. While this process may take some time, the benefits of gifting appreciated stock to qualified charities outweigh the inconvenience. Ultimately, this strategy allows donors to support charities, receive tax deductions, and potentially reduce future taxes by resetting the cost basis of gifted assets.
Overall, gifting long-term appreciated stock to qualified charities should be a consideration for philanthropically minded investors. This strategy benefits both the charity, which receives the value of the gifted position, and the donor, who can eliminate unrealized gains in their portfolio and receive a tax deduction. By repurchasing the gifted assets, donors can establish a new cost basis and potentially reduce future taxes. While there may be some inconveniences in the donation process, the long-term benefits make this strategy worth considering for charitable giving.
