Donating Appreciated Shares

INTRODUCTION

This is the White Coat Investor Podcast: Financial Boot Camp, your fast track to financial success.

Cole Anderson:
Hey, everyone! My name is Cole with White Coat Planning, and today Jim has asked me to get on here and teach you a little bit about donating appreciated securities. There’s an age-old saying that friends don’t let friends donate cash to charity. Now, don’t get me wrong. I love when people give to causes that they care about. Donating to charitable causes and organizations that we truly care about is one of the most important and powerful ways that we can spend our money. So when I say something as provocative as, “Friends don’t let friends give cash to charity,” I mean that literally. I mean cash. What I mean by that is that there is a smarter and better way to do it. I’m not discounting giving to charity, but we want to do it a little bit smarter than just handing over cash.

Before I get into it, I want to say that the reason to give to a charitable cause that you truly care about should be your desire to support that cause, that charity, that organization, or a religious tie. That should be the start and the finish of it. Any kind of tax advantage or deduction that you may get as a result of a charitable gift should not be the main goal. But if that’s something that’s out there, we want to be able to take advantage of it when it’s present.

My favorite way, and perhaps the best way, to donate money to charity is by donating appreciated securities like stocks, mutual funds, crypto, real estate, and all other types of investments too. When these securities are donated to a charity, the donor, meaning you, qualifies for the full charitable deduction as long as the investment that you’re donating has been held for at least one full year. So, 366 days plus, you get that deduction for the full value of the donated investment at the time that the gift is made. This also assumes that the donor is itemizing their deductions for taxes, so that’s another important note to consider. We’ll talk about that a little bit more later.

Additionally, the donor does not have to pay any capital gains taxes on the investment, and of course, neither does the charity. The charity gets the full value of the investment, and the IRS gets nothing. It’s a pretty good deal, if you ask me.

Now, let me give you an example of how this would work in real life. Let’s say that you’re a high-income doc, comfortably in the top federal tax bracket of 37%. For this example, we’re going to avoid state taxes because it’s just not very simple. So, let’s say that you want to donate $10,000 to your local animal shelter. Realistically, you could just write a check, collect the charitable deduction of $10,000, and move on with your day. That $10,000 gift would save you approximately $3,700 in taxes due with the charitable deduction, and that’s not bad at all.

Now, a note for the more detailed financial nerds out there: in reality, if you’re in the top tax bracket, there’s the 2/37 rule that would actually keep your deduction a little bit closer to $3,500, but we’re not going to talk about that today.

Now, I believe that there’s a better way to donate this money to this animal shelter. Instead of donating cash, let’s say you donate $10,000 in shares of VTI that you’ve been holding for several years in your taxable brokerage account. Now, let’s say those shares are at a 50% capital gain, meaning that your cost basis on that $10,000 is $5,000. In this scenario, if you donate the shares of VTI to the animal shelter, the shelter will then sell the shares and use the $10,000 in proceeds that they get to fund their operations. As a donor, you lock in that same $10,000 charitable deduction, saving you that $3,700 in taxes. But you also save on the capital gains that you would have paid on the $5,000 in appreciation that the shares of VTI had. If we assume a top capital gains rate of 20%, that’s another $1,000 that you’re not going to give to Uncle Sam, increasing your tax deduction by a little over 20% for the exact same gift amount.

Now, prudent WCIers will note that the best practice is to use your cash flow that was originally going to go to the animal shelter in this scenario to buy $10,000 in new VTI shares after you make that gift. So now you’ve accomplished your philanthropic goal with the $10,000 in VTI that you’ve gifted to the animal shelter. You’ve shaved off about $4,700 from your tax bill, and you remain fully invested in the stock market with a step up in basis.

Typically, most 501(c)(3)s can handle the donation of securities directly. So, if you’re worried about that, you really shouldn’t be. If it does become an issue, though, you can give appreciated securities to things like a donor-advised fund, which Jim has done several hour-long podcasts on, or something like a charitable checkbook. Typically, these types of alternatives alleviate any hiccups that may come up with smaller or local 501(c)(3)s or even your local church.

For clients that tithe, donating appreciated securities can meaningfully change your tax bill and your financial life. I won’t pretend to be an expert on religious tithing, but in my experience, I’d say that the typical amount is about 10% of your income. So if you’re a doc that tithes 10% of your income annually and you switch to donating appreciated securities, you can meaningfully increase your tax deductions without changing up your cash flow whatsoever. The money you’re saving on taxes can then be reapplied to other areas of your financial plan, like spending, saving, or, if you’re so inclined, increasing your giving.

Now, a couple of important notes here before I sign off. First, your charitable deduction is capped at 30% of your adjusted gross income with a five-year carryover period. In other words, or more simplistic terms, if your adjusted gross income is $100,000, you can donate up to $30,000 per year of appreciated stock and still receive the full charitable tax deduction. If you donate more than $30,000 with that same level of AGI, you can roll over or carry forward that additional deduction for up to five years.

For example, if you donate $50,000 in a given year when you make $100,000, $30,000 would be deducted in year one, and then $20,000 would be carried over and deducted from your income in year two, as long as that $20,000 is still less than 30% of your AGI in the next year.

Like I mentioned before, securities donated to charity must be held for more than one year, so at least 366 days in your ownership, in order to claim the full deduction for the value of your investment. If you hold them for less than that time, you can still give them to charity, but you’re going to be subject to just deducting your cost basis. It’s just less than ideal.

Another thing that I want to reiterate is that this only works if you itemize your deductions on Schedule A. With the One Big Beautiful Bill Act that was passed last year, a lot more people will be itemizing in the future. So if you think about your SALT deduction and if you have a mortgage on your big doctor house and are paying a decent amount of mortgage interest, you should probably be itemizing now, even if you do not donate to charity in a given year.

This last note is very important. For all non-cash charitable contributions over $500, so most people in this scenario donating appreciated securities, you must file IRS Form 8283 with your tax return. Okay, I’ll reiterate: file IRS Form 8283 with your tax return. So if you’re going to donate appreciated securities to a charitable organization that you care about, or to your church or whatever, please make sure that your CPA or your tax preparer, even if that’s you, gets this form ready. Thanks.

DISCLAIMER

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.