The landscape of charitable giving has evolved, especially regarding tax benefits. The 2017 Tax Cuts and Jobs Act has changed the traditional approach to charitable donations, making it less favorable for many individuals. However, a powerful strategy exists for those wishing to support their favorite causes while benefiting from significant tax savings: donating shares. This article explores how this approach works and the benefits it offers.
Before delving into the mechanics, it is essential to understand the prerequisites.
To take advantage of this strategy, individuals must possess a taxable investment account, as tax-advantaged accounts like 401(k)s and IRAs are generally excluded. However, exceptions apply for individuals aged 70½ or older. For most investors, establishing a taxable account is the necessary first step.
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Understanding the tax advantages of donating shares
One of the key concepts to grasp when donating stock is cost basis. This term refers to the original value of shares, which the IRS uses to determine potential capital gains for tax purposes. When individuals donate shares that have appreciated in value, they effectively reset the cost basis, minimizing tax implications when they eventually sell those investments.
For instance, if an investor has shares that have increased in value by 20%, donating these shares resets their perceived value, making it appear as though they have not appreciated at all. As a result, the tax obligations associated with capital gains will be lower when those shares are sold in the future.
The impact of tax-loss harvesting
Another strategy to consider is tax-loss harvesting (TLH), which allows investors to defer taxes while maximizing investment potential. Essentially, TLH enables individuals to deduct losses today in exchange for potentially facing higher taxes later. This strategy can be likened to giving the IRS an IOU, postponing tax payments.
However, when individuals donate shares that were part of a tax-loss harvest, they have the unique opportunity to eliminate any tax liability associated with those shares altogether. This makes donating shares an attractive tactic among high-net-worth individuals. Thanks to technological advancements, even everyday investors can easily access these benefits.
Streamlining the donation process with modern technology
The days of cumbersome processes for donating shares are gone. Previously, investors had to locate a charity’s brokerage information or fill out complex forms. Today, platforms like Betterment have simplified the process significantly. By simply logging into their accounts, investors can see which of their taxable investments qualify for donation, and the technology identifies the most tax-efficient shares to contribute.
This innovation streamlines the donation process and ensures that contributions have maximum impact. With just a few clicks, investors can donate shares and replace them, providing their investment portfolios with a fresh start while supporting a cause they care about.
Choosing the right charitable organization
Selecting the right charitable organization is crucial when considering a stock donation. Many organizations, such as educational institutions and community foundations, welcome stock donations, as these can significantly enhance their funding capabilities. For example, the Blackhawk Technical College Foundation provides scholarships and resources for students while addressing urgent needs through programs like Coins for Caring, which offers emergency assistance.
Moreover, contributions to such foundations are often tax-deductible, allowing individuals to support transformative initiatives while receiving favorable tax treatment. Whether considering a one-time donation or establishing a long-term giving plan, understanding the organization’s mission and goals can help guide decision-making.
A win-win for investors and charities
Before delving into the mechanics, it is essential to understand the prerequisites. To take advantage of this strategy, individuals must possess a taxable investment account, as tax-advantaged accounts like 401(k)s and IRAs are generally excluded. However, exceptions apply for individuals aged 70½ or older. For most investors, establishing a taxable account is the necessary first step.0
Before delving into the mechanics, it is essential to understand the prerequisites. To take advantage of this strategy, individuals must possess a taxable investment account, as tax-advantaged accounts like 401(k)s and IRAs are generally excluded. However, exceptions apply for individuals aged 70½ or older. For most investors, establishing a taxable account is the necessary first step.1
