How Your Appreciated Stock Can Reduce Your Tax Bill

It was a great year in the stock market, especially for long-term investors. Assets in non-retirement brokerage accounts may have substantial gains however, selling those investments could result in a large capital gains tax bill. What if you could avoid or reduce those capital gains taxes by using your appreciated investments towards charitable donations? If you are already making charitable donations each year, then this may sound like a pretty good deal!

Consider using a Donor Advised Fund (DAF) account. A DAF is a simple and easy to use tax advantaged method to giving. It is a charitable giving account administered by a section 501(c)(3) nonprofit organization available through most custodians such as Schwab, Vanguard, or Fidelity.

Key Characteristics of DAF accounts:

• Investors can contribute cash or appreciated stock to DAFs and receive an immediate income tax deduction in the year those contributions are made.
• Avoid high capital gains on appreciated stocks that may be adding to the concentration risk of your portfolio.
• Donors whose annual charitable donations fall below the level to benefit from itemized deductions in a single tax year can make a large tax-deductible donation to a DAF every several years, giving them the ability to itemize. Then they can use the DAF to make their preferred charitable donations for years to come.
• Take advantage of a larger charitable deduction in years with a major tax event such as selling a business or a home but need more time to develop your giving strategy.
• Donations to the DAF grow tax free.
• Certain DAFs may allow complex asset donations such as shares in privately held companies or real estate.
• Add DAFs as a beneficiary to IRA accounts ensuring your charitable wishes are upheld by an executor.

Let’s work through an example…

Take Bob & Susan Smith, they are retired and like to donate to various charities throughout the year and usually with cash held at their local bank. With medical bills, a mortgage and living in a high tax state, they do not have enough deductions to take advantage of itemization on their taxes. They have a joint brokerage account which holds appreciated stock positions from their years of investing. One of those positions is Apple Stock (AAPL) which has a long-term unrealized gain of almost $100,000. They want to diversify their investments but were reluctant to sell because of the 15% capital gains tax they would pay on the gains. Their advisor suggests contributing some or all their AAPL holding to a DAF instead of making charitable cash donations. They will be able to deduct this contribution as a charitable donation right away which will allow them to itemize in the year the donation is made and can avoid the capital gains tax on selling the appreciated AAPL stock. They will then be able to allocate their donations to their preferred charities for years to come from the DAF. Bob and Susan get to do the charitable giving that matters to them while reducing their income taxes and avoiding the capital gains tax they’d eventually be stuck with when selling their AAPL stock. That’s double the tax savings!

Keep in mind the annual limit on donating appreciated stock held more than one year is 30% of adjust gross income (AGI). Any contributions not deducted in the current year may be carried over and applied within the next five years until used, but not beyond.

To get started, first check if your custodian offers DAFs. If so, setting up the account should be quick and easy. Then work with your tax advisor and financial advisor to determine the assets and amount to contribute. Document all contributions and report those to your tax advisor. Some custodians may not report it on your end of year tax forms.

With the end of the tax year approaching, now is the perfect time to ask your advisor about Donor Advised Funds.

References:

“Are Donor-Advised Funds Good for Nonprofits? (SSIR).” SSIR.org, ssir.org/articles/entry/are_donor_advised_funds_good_for_nonprofits.

“Donor Advised Funds: A Smart Way to Manage Your Giving | Morgan Stanley.” Morgan Stanley, 2023, www.morganstanley.com/articles/donor-advised-funds-tax-benefits-for-charitable-giving.

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