Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
As an investor, you can opt to donate a variety of financial assets, from government bonds to mutual funds as well as cold hard cash. For certain investors, directly donating shares of a publicly-traded stock can also be one of the most appealing ways to contribute to a cause they care about. Donating stock can even yield a number of tax benefits, which can be a welcomed bonus.
Still, the process of donating stocks can be incredibly nuanced and there are numerous pros and cons. The benefits of donating stock to charity depend heavily on your financial situation and long-term goals— but with a thoughtful approach and strategy, sharing your shares with charity can be the gift that keeps on giving.
When donating stock to charity is a good idea.
Donating appreciated shares of stock can provide benefits to both parties, particularly with respect to capital gains taxes. If you donate a security with an unrealized capital gain, you won’t have to pay that capital gain in the future, nor will the charity. Even better, this donation is tax-deductible for those who itemize, allowing individuals to claim a tax deduction based on the fair market value (FMV) of the stock at the time of transfer (assuming they’ve owned the stock for more than 1 year).
Directly donating stocks can be an appealing way for investors to potentially reduce concentrated stock positions in their portfolio without incurring a major tax headache, but in order to realize these benefits, donors must consider a number of ground rules:
Rule #1: Be aware of the AGI deduction limits based on the type of asset you’re donating. For cash donations, donors may deduct up to 60% of their adjusted gross income (AGI). With stock donations, however, you are limited to 30% of AGI, meaning you may need to carry deductions into future tax years if your contribution exceeds this threshold. (Remember: this carryforward is only good for five years.)
Rule #2: Maintain receipts! The charity should provide you with written confirmation of your contribution. For tax reasons, you’ll need records showing:
- Name, address, and tax identification number of the charitable organization.
- Date of your contribution.
- Description of the stock. (name, ticker, number of shares, FMV)
- Confirmation that no goods or services were received in exchange for the donation. (if you want to full donation to be tax deductible)
Rule #3: Make sure that you’ve held the stock for at least a year and one day and that you’re donating shares with the largest unrealized gains.
Best types of stocks to donate
Clearly, there’s a significant upside for stock investors seeking to include charitable giving in their tax optimization strategy. There are, however, other factors to consider, including which kinds of stocks are best to donate.
- Winner stocks– Highly appreciated stocks are an especially attractive asset group to target with this technique. If your portfolio is holding any stocks with a large, unrealized long-term capital gain— a position which would incur a large capital gain at the time of sale— it’s probably a good candidate for a charitable donation.
- Stocks you’ve owned for over a year– Stock sales are subject to capital gains taxes, with different treatments based on how long the investor has held the stock. Whereas proceeds from short-term trades are treated as regular income, long-term gains are generally taxed at a lower rate, encouraging investors to hold their securities over longer time frames. The same principles apply to charitable contributions, and donors will obtain a much larger tax benefit for stocks contributed after the 1-year threshold. After one year and a day, these stocks will receive the ‘long-term’ capital gains treatment, meaning the donor will be able to deduct the full market value of their charitable contribution from their tax bill.
- Highly liquid stocks– For the sake of those receiving your donation, it’s also best to choose an asset that is highly liquid, and trades on a public exchange. Selecting a stock that is easy for the charity to liquidate saves them tons of hassle, as the process of setting up a brokerage account and conducting a complex securities sale can be burdensome for smaller organizations. Remember that on the other end of this transaction, there’s still a person who has to go through the trouble of cashing out your shares— save them some trouble and donate a liquid stock where possible.
Types of stocks you can’t donate
- Stocks owned for less than a year– If securities have been held for less than one year, donors would be subject to short-term tax treatment, meaning they’d only be able to deduct their cost basis for the donation. In other words, while it is still technically possible to donate stocks that don’t meet the holding period, your tax benefit is greatly reduced, and you’re likely better off donating cash or another asset.
- Loser stocks– You wouldn’t want to donate stocks that have incurred portfolio losses, in place of a capital gain. In most cases, these losses offer their own tax benefits, so realizing the loss yourself could be a better means for offsetting other taxable income.
- Privately held stocks– Privately held stocks or restricted shares of public stocks aren’t the most charity-friendly contributions. While there’s no rule saying these can’t be donated to charity, some charities may not be equipped to handle private stock, and obtaining the approval to sell restricted shares of public stocks can be an administrative nightmare. Charities tend to immediately sell stock contributions, providing them with liquid funds for their mission, so as a donor it’s best to help make this sale as seamless as possible.
Types of charities you can donate stock to
There’s no shortage of good causes out there, and as a result, there’s likely a wide variety of organizations competing for your charitable attention. For those seeking to make a tax-deductible donation, however, it’s important to double-check that you’re contributing to a qualified charity. The IRS offers a list of organizations that do not fulfill their requirements for charitable classification (including certain political, civic, and lobbying groups), providing clear guidelines for donation deductibility.
Donors should also be beware of the differences between public charities, private operating foundations, and private non-operating foundations.
Public charities are organizations that receive support from a wide cross-section of donors. Private foundations receive funding through private contributions, investments, and endowments. A private operating foundation will spend substantially all of its income each year fulfilling its charitable mission, while a private non-operating foundation will typically make grants to other organizations and may not distribute all their contributions received each year.
When it comes to the deduction benefit, private non-operating foundations offer a smaller tax deduction footprint. For public charities and private operating foundations, donors may deduct the FMV of the donated stock up to 30% of AGI, but for certain private non-operating foundations, FMV deductions are limited to just 20% of AGI. Always be sure to double-check which category your organization of choice falls under.
Some investors will also find it advantageous to set up a unique charitable structure, commonly known as a Donor Advised Fund (DAF), well-equipped for optimizing the tax treatment of a variety of asset donations. For example, an investor holding a stock with a low-cost basis (which would generally be subject to a capital gains tax) can instead transfer the asset to a DAF and make a grant to a charity of their choosing at some future date. Not only will this allow the individual to take an immediate tax deduction— DAFs also offer donors more flexibility in the liquidation of the donation, allowing them to either convert it to cash immediately or reallocate the donated shares and grow the money over time.
When’s the best time to donate?
Whether for tax planning reasons or the season of giving, most clients tend to think about charitable donations near the end of the year. While most charities are doubtlessly happy to accept contributions at year’s end, their funding needs can vary by market, and there are likely many organizations who would benefit from donations earlier on in the year.
Market volatility can also have an outsize impact on the timing of your donation, particularly if you’ve previously committed to a fixed dollar amount. Naturally, during short-term declines, the FMV of the stock you’re donating is likely to decline, requiring you to donate additional shares to meet your charitable obligation. In this situation, investors can keep a close eye on the fluctuations of the market, opting to make their most substantial donations while the market is stable or experiencing an upswing.
When it’s not such a good idea to donate.
While directly donating a portion of your stock portfolio can provide numerous opportunities to minimize your tax burden and boost your charitable giving, in practice, there are a few exceptions. For example, some smaller charities (i.e. churches, foster homes, local food pantries) may not have brokerage accounts set up to receive stocks. This setup process can present a number of obstacles— trading costs, regulatory hurdles, and a variety of other administrative hassles— all just so the charity can liquidate the stock and cover their day-to-day operations. For these organizations, there are likely better mechanisms for offering financial support.
Similar stipulations apply when the stock you’re holding represents a stake in a privately-held entity. Shares are even more difficult to liquidate in secondary markets, so if selling publicly-traded shares is already a burden for your charity of choice, a privately-held stock will likely be even less convenient.
Remember that you will only receive a tax deduction if you itemize your deductions. If you typically fall below the standard deduction line, consider a Donor Advised Fund as a way to “bucket” several-years’ worth of contributions into one tax year for purposes of getting the itemized deduction, but maintain the flexibility to dole out those donations to charities over multiple years.
Want to optimize your charitable giving?
Charitable giving can be one of the most fulfilling parts of having wealth. Through your own financial wellness, you can make a positive impact on the causes you care about most in this world. Still, you don’t just want to give blindly. When structuring your donations, there’s a number of challenges you may encounter— tax pitfalls, deduction limits, liquidation issues— which is why it’s important to stay well-informed about contribution rules and requirements.
To maximize the benefit for both yourself and for the recipient of your donation, you’ll need a strategy, personalized to your own financial needs and objectives. This is where Private Wealth Design comes into play. By helping you design a customized plan for growing your wealth over time, our team at Monument can help you consider all available charitable giving options, providing a clearer understanding of why it’s worthwhile to choose one over another.
It’s time to find clarity around your finances and remove the anxiety of the unknown.
Read our case study, “High Earners Eye Retirement,” to see how we helped one of our clients with their wealth planning.
Ready for straightforward, unfiltered opinion and tailored advice for YOUR
questions, not everyone else’s?
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.