The landscape of charitable donations has evolved significantly, particularly following the enactment of the 2017 Tax Cuts and Jobs Act. This legislation has impacted the charitable tax deduction, making it less advantageous for certain taxpayers. For those aiming to make a difference, donating shares of stock presents a strategic alternative. This article explores how share donations can support charitable organizations while optimizing your tax situation.
It is crucial to note that donations must originate from a taxable investment account. Therefore, if you are interested in this tax strategy, establishing and funding a taxable brokerage account is necessary. This requirement lays the groundwork for effectively leveraging share donations.
Understanding the tax advantages of donating shares
Donating shares offers a unique opportunity to reduce tax liabilities through a concept known as cost basis. This term refers to the original value of an asset, essential for calculating capital gains—the profits made from selling an investment. When you donate appreciated stock, you can reset the cost basis to the current value, significantly lowering your taxable profits when you eventually sell those investments.
How cost basis works in share donations
For example, consider a scenario in which you own stock that has appreciated by 20%. If you donate this stock, the IRS treats it as though it has not increased in value. This means you avoid paying taxes on the gains accumulated at the time of donation, effectively eliminating the associated tax bill up to that point. This approach allows you to manage your taxable income while supporting a cause you are passionate about.
The tax benefits of share donations can be further enhanced when combined with strategies like tax-loss harvesting. This method enables investors to sell losing investments to offset gains from profitable ones, thereby reducing overall tax liability. By donating shares identified through tax-loss harvesting, you can entirely eliminate the tax obligation on those gains.
Streamlining the donation process with technology
Traditionally, donating shares involved a cumbersome process. Investors had to gather brokerage information for charities, select which shares to donate, and complete various forms. However, technological advancements have significantly simplified this process. Platforms such as Betterment now allow investors to donate shares with just a few clicks.
With Betterment, you can easily identify which of your taxable investments are eligible for donation. Their TaxMax technology helps pinpoint the most tax-efficient shares to give away. This streamlining not only saves time but also maximizes your charitable impact.
Charitable Giving Accounts: A modern solution
In addition to direct share donations, consider utilizing a Donor-Advised Fund (DAF). These funds allow you to contribute assets and receive an immediate tax deduction while deciding later how those funds will be distributed to charities. DAFs have gained popularity due to their flexibility and convenience in managing charitable giving.
Different providers offer varying minimum account sizes and fees, making it essential to evaluate options such as Daffy, Fidelity, and Vanguard to find one that aligns with your giving strategy. For instance, Daffy has no minimum to open an account, making it accessible for individuals at any financial level.
Considerations for donating shares
Contributing shares of stock to charitable causes is an effective method to support organizations while enhancing your tax strategy. By donating appreciated shares, you can reset your cost basis and mitigate tax liabilities, creating a beneficial situation for both your finances and the charitable organizations you wish to support. With modern technology simplifying the process, it is easier than ever to make a meaningful impact.
It is crucial to note that donations must originate from a taxable investment account. Therefore, if you are interested in this tax strategy, establishing and funding a taxable brokerage account is necessary. This requirement lays the groundwork for effectively leveraging share donations.0