Do you typically make charitable gifts at year’s end by writing checks or using a credit card? If so, we would suggest you could increase your giving to be much more tax efficient by creating a donor advised fund (DAF) and donating appreciated assets to that fund. Then you can request the DAF to send donations to a multitude of charities you wish to support.
Any time you have appreciated assets such as stock, when you actually sell the stock, you will pay taxes on the appreciation (either short term or long term capital gains tax). Even if you are not ready to part with the appreciated stock, when it is partnered with a philanthropic endeavor, you can capitalize on some tax savings. The reason that this is more efficient is that you don’t have to pay any capital gains taxes on appreciated assets donated to a DAF. If you still want to own the stock, then use the money you were going to donate in stock and buy back the stock at today’s higher price. (In some cases you must wait 30 days to repurchase – but your new basis will be at the current price.) There are many institutions that provide donor advised funds such as Fidelity or (if you are Jewish) The Combined Jewish Philanthropies who provide online requests for donations and make it very easy to fulfill your charitable desires.
Example:
There are 5 charities you typically make gifts to ranging from $50-$2500 a year for a total of approximately $5000. Up until now, you make your gift by writing checks or using a credit card for points.
If you have a stock in your investment portfolio with gains – you bought it for $1000 and it is now worth $5000 – when you sell that stock you pay taxes on $4000 of gain. If you donated it to a DAF, you are making a tax-deductible gift of $5000 and you do not pay the taxes on the gain. This saves you approx. $1120 (assuming 28% Cap Gains rate).
As you liked that stock and want to still have it as part of your portfolio, you can re-purchase it at your brokerage firm by placing an order to purchase as many shares of that stock that are worth $5000. You now own those shares with a basis of $5000, so as future increases occur, your new taxable base is $5000.
Advantages:
- You can make the gift of stock at any time throughout the year and get the full tax deduction
- No capital gains taxes paid on the appreciated stock
- Ease of recommending gifts to your 5 charities with the DAF writing the checks
- Higher basis in your stock portfolio for future sales.
So before writing those year-end checks, do you have any appreciated assets in your non-retirement plan portfolio? Consider donating a piece of those to a DAF and be more efficient in your giving.
This material is for informational purposes only and is not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation.
photo credit: Ken Teegardin, Flickr