Consider donating appreciated stock and mutual funds

DAF Benefits and Disadvantages for Charitable Trust and Giving to Charity or to Donate Appreciated Stock

If you donate appreciated stock to a charity of your choice rather than cash, it could lower your tax bill this year. Even if it will be a difficult challenge in the current economy, this is still one of the best tax preparation techniques at your disposal. This section of the tax code offers two tax advantages:

  1. Increased deduction. The higher fair market value of the appreciated stock on the date of your donation is what you can deduct for charitable purposes. The alternative would be the price you initially bought for it.
  2. No capital gains tax. The earnings you make after selling the stock are not subject to taxation. You can postpone paying long-term capital gains tax on the growth in the value of your stock as long as you have kept the investment for longer than a year.

A sweet example

100 Honey, Inc., shares that Winnie and Christopher each purchased for $1,000 three years ago. The stock is currently worth $5,000. (after taking a bit of a sticky hit in the down market). While Christopher contributes his shares directly to “Honey Overeaters: Finding a Cure,” Winnie sells the stock and sends the earnings to “Save the Bees.” Considering a long-term capital gains tax rate of 15%*, a marginal income tax rate of 25%, and no other restrictions:

By contributing his appreciated stock, Christopher receives an extra $750 in federal tax benefits. In addition, Honey Overeaters gets an additional $600 for their charity endeavors.

Benefits to lower your 2022 tax bill

  • Unlike other deductions, the Alternative Minimum Tax (AMT) does not affect charity deductions.
  • Keep in mind that this strategy also donates more money to the charity of your choice. The additional money is paid as federal taxes when you donate cash or checks.
  • This tax benefit can be even more valuable if our honey lovers earn more money. There is a potential 3.8% net investment income tax on top of a possible 20% long-term capital gain tax rate.
  • This advantage is available to all itemizers with qualifying assets, not only the wealthy.

Considerations when you donate appreciated stock and mutual funds

  • Remember that this advantage only applies to eligible investments held for more than a year, mainly equities and mutual funds.
  • Be careful because investments like inventories and collectibles do not qualify.
  • Take this as a substitution for donations you typically make to eligible organizations.
  • Speak to the charity you want to support. They frequently have a preferred broker who can assist in adequately accepting the donation.
  • Contribution caps in terms of a percentage of gross income may be in effect. Extra contributions are frequently allowed to be deducted for up to five years.
  • It’s crucial how you handle the transaction. The direct investment donation to the charity organization must be apparent to the IRS.

Please contact our RRBB accountants and advisors to handle the gift properly if you decide this opportunity is right for you.

* If your eligible investment income exceeds the applicable threshold amounts, the total tax rate on this type of investment could be as high as 23.8%. To further calculate, you’re looking at 20% capital gains tax plus 3.8% net investment income tax.


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