The landscape of charitable giving has undergone significant changes, particularly after the 2017 Tax Cuts and Jobs Act. This legislation notably affected the charitable tax deduction. Many individuals remain eager to support their preferred causes, but the previous tax incentives may no longer be as advantageous. An appealing alternative is the donation of shares of stock. This approach not only benefits the selected charity but also provides potential savings on taxes.
This article outlines the key aspects of donating shares, equipping you to make informed decisions that align with both your philanthropic objectives and financial interests.
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Understanding the benefits of donating shares
Understanding the tax benefits of donating shares
Donating shares instead of cash can significantly affect your tax obligations. This strategy is centered around the concept of cost basis, which represents the original value of an asset for tax purposes. The Internal Revenue Service (IRS) calculates your capital gains taxes based on this figure. By donating shares, you effectively reset the cost basis of your investments, allowing you to reduce potential capital gains taxes in the future.
How it works
Consider a scenario where you purchased a share for $100, and its value has since increased to $120. If you sell the share, you would incur a capital gains tax on the $20 profit. However, by donating that share directly to a charity, you avoid this taxable event. Instead, you can replace it with another share, resetting the basis to the original purchase price, thus eliminating the tax implications of the gain.
The strategy allows investors to maintain their net worth while effectively reducing their tax bill when they sell the replacement share. This approach is especially beneficial for those with significant investments, making it a favored option among affluent individuals.
Simplifying the donation process
Traditionally, donating shares involved navigating a complex array of paperwork and procedures. Investors often had to collect details about the charity’s brokerage account, select the stocks to donate, and complete various forms. Fortunately, advances in technology have significantly streamlined this process.
Platforms such as Betterment enable users to donate shares with minimal effort. The interface not only identifies which taxable investments are eligible for donation but also employs advanced algorithms to select the most tax-efficient shares. This method simplifies the donation process for everyday investors seeking to make meaningful contributions.
Comparing donation methods
Several methods exist to facilitate donations, including Donor-Advised Funds (DAFs). These funds allow individuals to contribute assets and receive immediate tax deductions while distributing funds to charities over time. Below is a brief comparison of some popular options:
| Platform | Minimum to open | Annual cost | Investment fee |
|---|---|---|---|
| Daffy | $0 | $36 | 0.05% |
| Fidelity | $25,000 | 0.60% or $100 | 0.54% |
| Schwab | Varies | 0.60% | 0.65% |
| Vanguard | Varies | 0.60% or $250 | 0.06% |
Maximizing your charitable impact
Donating shares and strategically replacing them can significantly enhance your charitable contributions while providing opportunities to reduce tax liabilities. Integrating this approach with tax-loss harvesting further strengthens your financial strategy. Tax-loss harvesting enables you to offset gains with losses, and when combined with share donations, it can potentially eliminate taxes on both transactions.
When considering charitable giving, it is important to recognize that investing in platforms that simplify the donation process can equip you with the necessary tools to make informed financial decisions. By leveraging technology, you can concentrate on the causes that resonate with you while reaping the benefits of tax-efficient giving.
Donating shares presents a distinctive opportunity to support charitable organizations while effectively managing your tax obligations. By grasping the underlying mechanics of this approach, you can enhance your philanthropic efforts and maximize the impact of your contributions.
