When choosing between donating cash or stock, it is important to consider the charitable stock swap. Giving stock to charity is cheaper than giving cash. When making a gift of stock that has gone up in value and held longer than one year, two tax savings are produced. The donor saves income taxes by taking a charitable income tax deduction for the full fair market value of the stock and will avoid capital gains taxes had the stock been sold. A cash gift saves only income taxes.
Despite the benefits, many people are reluctant to give stock. Some hesitancy stems from not wanting to change the make-up of their overall portfolio. Appreciated stock that may make a good gift has also been a good investment; therefore, a person decides to keep the stock and gives cash instead.
Fortunately, the charitable stock swap allows you to enjoy the tax benefits of giving stock and maintaining the stock in one’s portfolio.
How a Charitable Stock Swap Works
Upon giving stock to charity, the donor may immediately repurchase the stock by using the cash that would have been given, thus restoring the balance of the pre-gift portfolio. The out-of-pocket expenses are the same as if cash had been given to charity.
Assume a person in the 37% tax bracket wants to make a $250,000 gift to charity. A gift of cash will save the person $92,500 in income taxes ($250,000 x 37%). The net cost of the gift will be $157,500.
If stock valued at $250,000, which initially costs $50,000 to buy, is given, the person will save the same $92,500 in income taxes plus $47,600 in capital gains taxes ($200,000 x 23.8%). The net cost of the gift will be $109,900.
In addition to saving income and capital gains taxes, the donor now has a new higher basis for the stock without incurring any capital gains tax. The new higher basis will result in lower future capital gains tax once the stock is eventually sold.
No “Wash Rule” is in Effect with a Charitable Stock Swap
Investors may wonder if this transaction is affected by the “wash rule”. The “wash rule” prohibits someone from taking a loss on the sale of a stock that has gone down in value and repurchasing it within thirty days before or after the sale. There is no “wash rule” here because the stock given has appreciated instead of gone down in value. The Charitable Stock Swap can happen at the same time the gift is made.
Both Itemizers and Non-itemizers Benefit
Only those who itemize deductions on their tax returns are able to fully benefit from the value of their gifts, although the SECURE ACT does allow non-itemizers to deduct $300 for charitable gifts; $600 for married couples.
While the charitable income tax deduction is reserved for itemizers, the avoidance of capital gains tax applies to both itemizers and non-itemizers. Like itemizers, non-itemizers can avoid capital gains tax by giving appreciated stock and repurchasing the stock through a Charitable Stock Swap. This is a powerful way for non-itemizers to maximize the tax advantages of charitable giving.
Give Us a Call to Discuss the Charitable Stock Swap
We are available to answer any questions you may have about a Charitable Stock Swap and assist with the transfer of appreciated stock. We would be happy to talk by phone, exchange email or set up a time to have a video chat.
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.
