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Gifting Stocks as an Income Tax Planning Transaction

Tis the season to be jolly, and tis the season to be giving . . .

Although I feel that there is no specific time when one should give back. Giving back should be part of our ongoing budgets.

I understand that tough times can force us to pull back from some or all of our giving activities, but I know that as much as some of us complaint, there are many more who have so much less than we do.

So with the Holidays around and the spirit of giving in the air, I decided to gift some of my appreciated stock to a charitable organization of choice.

If you are interested in donating and have appreciated stock in your portfolio, consider gifting stocks to maximize the benefit to the charity as well as your own tax return.

Here is how a donation of appreciated stock can benefit you from an income tax planning perspective.

Let’s say you have made up your mind to donate $10,000 to charity this year.  You can either donate $10,000 in cash that you have already been taxed on, you can sell $10,000 worth of stock, pay capital gains tax and then donate what’s left, or you can donate appreciated stock directly.

Let’s say you have stock that is worth $10,000 in your portfolio that you paid $5,000 for 4 years ago (your cost basis is $4,000).  If you sell your stock worth $10,000, you will be taxed on long term capital gains at a rate of 15%.  That means you get $8,500 in hand after taxes.

If you are in the 35% tax bracket and donate the $8,500 cash received, you will receive a $2,975 tax benefit from your contribution ($8,500 times your tax rate of 35%).

However, if you donate stock directly without selling it first, you are entitled to a tax deduction of the full $10,000 in stock, which will result in a tax benefit of $3,500 ($10,000 times your tax rate of 35%).

Another way to look at this is as follows:  You bought the stock for $5,000 and you received $3,500 back from uncle Sam.  Your net out of pocket spend was therefore $1,500 and 4 years of holding time.  In return however, you were able to donate a nice sum of $10,000 to the organization of your choice.

Many purposely prefer gifting stocks to maximize the published amount of donation ($10,000) while minimizing out of pocket cost ($1,500).  As you can imagine, donating a larger or larger sum has non-financial implications as well such as higher societal status, preferential treatment, etc.

If you are interested in stock contribution, most charitable organizations work well with brokerage accounts and banks, making stock contribution a seamless process.

Screening Charitable Organizations Before Gifting Stocks

Always screen the organization you contribute to.  A reputable organization should have a website where its financial statements (in GASB format – Government Accounting Standards Board) are available.  If not online, always request for an audited set of financial statements.

Why is this important?  Because many 501c3 organizations (also known as non profits) take advantage on the “no tax” situation to use funds as high salaries and “other administrative” expenses.  I have seen some organizations where up to 40% of your contribution goes toward admin expenses, pushing only the remaining 60% to the cause of your choice.

Therefore, it is always important to understand what an organization’s administrative costs truly are.  You want to ensure that most of your contributions go toward the cause of your choice,   and not as a fat salary check to the non profit’s CEO. Yes, non-profit organization employees do get paid as well.  Some of them REALLY WELL.

Note: United Way has one of the lowest admin cost ratios and I have been giving to them since 2003.

Personal Note on Giving

I have always believed in giving back.  I believe that I have a fiduciary responsibility toward society and the world in which I live in. I have been blessed and given way more than I deserve and could ask for in many ways.  The least I can do in return is give back and help a greater cause.

Ever since I first started making money, I made it a point to put aside 5% of my pay into a charitable fund. As I progressed in life, I increased the percentage to 10%. One of the reasons that keeps me motivated and driven toward achieving more is the desire to give back more.

In my own experience, the more I have given over the years, the more I have gotten back. I am not sure if that’s due to “Karma”, spiritual reward or something else, but the fact remains true.

This is not my way of preaching to you or convincing you to donate money.  I am simply sharing my own experience like I do when I blog about activities that lead to financial gain.

That said, if you don’t already give, I certainly hope you join millions around the world give back to society, mankind and the world in which we all live in, particularly this holiday season when the spirit of giving is all around us.

Readers: Any experience gifting stocks? Why did you do it and what was the outcome?

Gifting Stocks

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