Donating “Shares” vs. Cash

Wednesday, December 20th, 2017

Good Morning Relaxing Retirement Member,

As the end of the year approaches, many of us write out sizable checks to our charities and non-profit organizations of choice, and of course, our alma mater.

While using cash and writing out checks is the most popular way to do this, there is another method you should consider which likely makes much greater tax sense: donating appreciated shares of investments.

As we discussed last week, selling shares of investments held outside of IRAs which have appreciated in price incurs capital gains taxes.

When you donate shares as opposed to cash, you can avoid these capital gains and potentially make a bigger donation.

Essentially, you can sell shares of an appreciated investment, pay the capital gains tax, and then donate the proceeds to charity; Or, you can donate the shares directly to the charity prior to selling them.

Let’s walk through a quick example of someone in the 33% tax bracket making a $10,000 donation.

Sell Your Shares and Donate the Proceeds

Let’s assume the exchange traded fund you purchased years ago for $4,000 is now worth $10,000.  If you sold it, $6,000 is subject to capital gains tax.

At a combined federal and state capital gains tax rate of 20%, you would owe $1,200 in taxes, thus netting you out at $8,800 after taxes.

Assuming you then donated the $8,800 proceeds to charity, your tax savings on your donation would be $2,904 (33% bracket).

Donate Your Shares

As an alternative, if you donated the full market value of your shares to charity, $10,000, your tax savings on your donation would be $3,300 (33% tax bracket).

And, your charity would receive $10,000 instead of $8,800.

The key component of this is your charity of choice does not pay capital gains tax when they sell your shares because charities don’t pay taxes.

Mechanics

The mechanics of this are actually quite simple.  Ask your charity of choice for their gifting instructions for donating securities (Account custodian, Account number, DTC number, etc.).  All sizable charitable organizations have brokerage accounts which receive charitable donations of shares.

Provide these written instructions to your account custodian, i.e. Charles Schwab, and designate the holding you wish to donate and the number of shares.

You would then receive a receipt indicating the fair market value of the donated shares to use for income tax return preparation.

If this is something that makes sense to you, simply let us know and we can help walk you through it.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)