At the writing of this article, the S&P and NASDAQ indexes are at an all-time high, and the Dow is nearing one. The dramatic stock market downturn experienced in the early days of the COVID-19 outbreak has been largely reversed. In spite of the turnaround, uncertainty and volatility are still market realities. No one knows where the markets will go from here. Acknowledging this uncertainty, you may be thinking of capitalizing on the market rebound and selling some of your holdings. Of course, the price to pay for selling investments that have performed well is capital gains taxes. For higher income individuals, 23.8% of a stock’s gain will be due in the form of a capital gains tax.
Charitable giving offers an opportunity to put the full value of a wise investment to good use by avoiding any capital gains tax upon the gift of stock. Here are four ideas that you may help you harvest the gains of appreciated stock:
- You can make an outright gift of shares of stock that have been held longer than a year and avoid paying any tax on the appreciation. The charity receiving your shares can sell them without paying any tax, and thus the full fair market value of the stock will be available for use by the charity. You will derive economic benefit as well. In addition to bypassing capital gains tax, you will receive an income tax deduction for the value of the stock. The deduction is determined by taking the average of the high and low price of the stock on the day it is transferred into the charity’s account.
- If you have a stock that is highly appreciated and would like to keep it in your portfolio, consider a Charitable Stock Swap. This entails making a charitable gift of the stock you like and use the cash you had considered giving to repurchase your stock. This can happen simultaneously with your charitable gift. The stock you give will bypass capital gain tax and save you income taxes. By repurchasing the stock, you have effectively mitigated future capital gains by establishing a higher cost basis. Because you are dealing with stock that has increased in value, as opposed to stock that has declined, there is no wash rule to consider.
- You may want to keep part of your investment and not give it all away. In such case, a part sale/part gift may be a good option. By giving a portion of the stock to charity and selling the rest, you may minimize or offset completely the capital gains tax due on the sale portion. The gift of stock generates an income tax deduction and bypass of capital gain tax. These tax savings may be sufficient to cover any tax you may owe of the stock you sell.
- You can use appreciated stock to fund a life-income gift such as a charitable gift annuity or charitable remainder trust. Such a gift can provide a steady stream of income for you and your spouse. In addition to receiving income, you will also save income taxes and avoid capital gains tax on the sale of the stock. This is an especially effective tax-wise option to increase income from a low-yielding, highly appreciated stock.
This information is not intended as tax, legal or financial advice. Consult your financial advisor for information specific to your situation.
About the Author
Since 2000, Randy has served as Director of Planned Giving for Southwestern Medical Foundation and UT Southwestern Medical Center. He works with donors to suggest bequest language to share with attorneys, establish charitable gift annuities and charitable remainder trusts, utilize beneficiary designations for retirement plan accounts and explore gifts of other non-cash assets like real estate and life insurance. After receiving a Masters of Divinity degree from Vanderbilt University, Randy began a career in development, working in higher education, the arts and in academic medicine. He received the Chartered Advisor in Philanthropy designation (CAP) through the American College of Financial Services.
To contact Randy Daugherty, please call (214) 648-3069 or email him at randal.daugherty@utsouthwestern.edu.
Learn more about making gifts of stocks and bonds.
Read more about Dr. Kirsten Fischer-Lindahl, who established a charitable gift annuity to benefit female faculty through UT Southwestern’s Office of Women’s Careers.