Donate stock to charity for bigger tax savings

Investors could be making a greater impact with their charity and saving more on taxes by donating stock instead of cash. Be sure to get the most bang for your charitable buck.

Don’t leave money on the table

Donating to charity feels good. So does the tax deduction. It’s not surprising that nearly 75% of high-income taxpayers donate cash to charity. But fewer than 10% donate marketable securities.¹ This is surprising given the tax advantages of donating long-term appreciated securities (i.e., those held more than one year²) versus cash.

When you donate appreciated securities to a qualified charity, the fair market value is deducted from your taxable income and neither you nor the charity will be taxed on the capital gain. Therefore, you can make a bigger impact with your charitable donation by gifting your stocks rather liquidating them and gifting the cash that remains after you’ve paid up to 23.8% in federal capital gains tax.³

Give yourself the gift of lower taxes

There are two ways to reduce your tax costs through securities donations:

Gift your star performers. Maximize your savings on capital gains taxes by donating your strongest performing stocks. They may be your favorite holdings, but this is not goodbye – replenish your portfolio by purchasing the same security (or a similar exposure). Because the stock has appreciated since your original purchase, your new cost basis will be higher, which creates the potential to harvest tax losses to offset gains in future years.

Rebalance for a cause. When your portfolio has drifted from its target allocation, it’s time for rebalancing, which is a great time to think about your favorite charities. As you trim outsized exposures, consider donating your lower cost-basis long-term holdings as this will reduce the tax impact of rebalancing.

Know your limits

As a charitable investor, maximizing the benefit of your charitable contributions should be considered as a part of your annual tax planning. This requires an understanding of the charitable deduction limits for the current year, keeping in mind that tax laws change from time to time. You may have taken advantage of the temporarily higher limits provided by the CARES Act in 2020 and 2021, so this is a good time for a refresher as we return to pre-pandemic limits.

Deduction limits vary depending on whether you donate to public or private charities,⁴ and whether you donate cash or some other type of asset. For the sanity of our readers, we will focus only on what’s relevant for most individuals: contributions to public charities in the forms of cash and appreciated securities that you’ve held more than one year.

If you make all of your donations in cash, the maximum amount that you may deduct against your taxable income is 60% of your adjusted gross income (AGI). If you donate securities instead of cash, you may deduct up to 30% of your AGI. Pretty simple so far, right? 

Now, what if you want to donate a combination of both cash and securities? For this scenario, the rule maintains the limit for cash donations at 60% of AGI but limits the deduction for securities donations to the lesser of 30% of AGI or 50% of AGI minus the amount of cash that is deducted. If you work through the math, you will conclude that the maximum amount you can deduct for cash and securities combined is 50% of AGI.

Strategize to maximize your tax benefit

The greater the proportion of your charitable contributions that are comprised of eligible securities versus cash, the greater your tax benefit. Therefore, if you plan to make donations to public charities totaling up to 30% of your AGI this year, consider making those donations entirely in the form of securities. If you plan to donate between 30% and 50% of your AGI, consider donating 30% of AGI in the form of securities and the remainder in cash.

Achieve more tax savings by donating securities

This is not to say that donating only cash in order to be eligible for the higher deduction limit of 60% of AGI is necessarily tax inefficient. If the stocks you are considering for donation have appreciated only minimally, it is possible that the capital gains tax savings may not compensate for the incrementally higher deduction that is permitted for all-cash donations. A tax professional can help you determine the most tax-efficient strategy for your circumstances.

Excess contributions? Keep calm and carry forward.

If your donations exceed the deduction limits in any given year, you can carry the excess forward. Put simply, you can apply the excess amount as a deduction against your AGI in a future tax year. But of course, there are some rules:

• You can carry forward excess charitable contributions for up to five years.
• You must first deduct the contributions you made in the current year before applying amounts carried over from prior years.
• If you accumulate carryover contributions from multiple years, you must apply them chronologically, beginning with the earliest year. You can think of it as a “first-in, first-out” methodology.
• The current-year deduction limits always apply. In other words, any excess contributions that you have carried over from previous years will be subject to the limits in effect for the year in which you apply the deduction on your tax filing, not the year in which you made the donation.

The bottom line

• Donating long-term appreciated securities to public charities can provide additional tax savings versus cash contributions.
• Donating your stronger performing holdings increases your savings on capital gain taxes. You can also reduce the tax impact of your portfolio rebalances by donating outsized exposures.
• Be aware of the current charitable deduction limits and plan your giving for the year ahead to maximize the tax benefits of your contributions.
• A tax-conscious advisor can help investors fulfill their charitable inclinations while taking advantage of opportunities to achieve greater tax savings.

If you are a financial professional, ask your BlackRock representative about the benefits of partnering with BlackRock and Aperio as you build and manage portfolios that reflect your clients’ unique tax considerations