The Power of Appreciated Stock in Charitable GivingSubmitted by American Endowment Foundation on November 26th, 2018
By Eric Kinaitis
Is the enjoyable growth that most stockholders have seen over the last decade coming to an end?
One school of thought looks at the Total Market Cap to GDP ratio (apparently a favorite indicator used by Warren Buffett) that compares the total price of all publicly traded firms to the gross domestic product. The premise is that stock valuation should have some direct linkage to the total value of goods and services produced. A measure of 100% would indicate that American stocks are fairly valued. The higher that number is over 100%, the greater that the stock market is over-valued. As of publication date, that reading is at 131.7% (see updated daily ranking here.)
If these indicators are to be believed, now may be the time to divest from highly appreciated stocks. However, with any stock sale gain comes a capital gains tax hit. How to avoid potential future investment declines and avoid capital gains tax? Appreciated stock is a powerful tool for charitable giving that is often overlooked.
Some rules apply depending upon how long you’ve owned the appreciated stock in question:
- Less than a year: If the stock has been owned by you for less than a year, your deduction is limited to the cost basis (what you paid for the stock) not the current market value.
- More than a year: Stock held over a year can be deducted at its current fair market value on the date it is gifted.
The IRS does mandate some limitations. Deductions for appreciated stock is limited up to 30% of adjusted gross income (AGI) in the year of the donation, with a 5-year carry-forward for unused deductions.
Although it is possible to gift those appreciated shares directly to a charity, placing them within a donor advised fund (DAF) may be more beneficial.
The first issue is that some charitable organizations may not have the capability or understanding on how to accept a gift of stock and how to liquidate it. Using a donor advised fund (DAF) at American Endowment Foundation gives you a tool whereby your appreciated stock can be gifted into the fund and held in that format.
A DAF also gives a donor the freedom of time; they can make their charitable grant at a time that fits their schedule yet still benefit from an immediate income tax deduction in the year they deposited those appreciated shares into the DAF. This is an especially valuable consideration when a donor is looking at “bunching” their charitable deductions in order to maximize tax benefits to the donor by pushing itemized deductions above the new higher standard deduction.
The donor may also benefit from no capital gains or net investment income tax on their gift of appreciated stock. This can reduce the “gift cost” by as much as 24% when compared to giving cash. Furthermore, any continued growth of those appreciated shares within the DAF will be tax-free.
Contact or call us at 1-888-660-4508 to discuss specifics on how to put the power of appreciated stock to good use in charitable giving.
Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.