During the holiday season, many families engage in cherished traditions, from decorating trees to donating to charitable causes. However, the method of giving often lacks efficiency. Instead of cash donations, financial experts are advocating for the benefits of donating appreciated securities, such as stocks and mutual funds, which can yield greater financial advantages for both the donor and the charity.
Understanding the Benefits of Donating Appreciated Securities
For those looking to make a charitable contribution, donating appreciated securities offers two significant benefits: a charitable deduction based on the full market value of the asset and the complete elimination of capital gains tax. This approach not only maximizes the potential impact of the donation but also helps to reduce the donor’s tax burden.
Consider a practical example: If an individual purchased stock for $10,000 fifteen years ago and its current value is $50,000, selling the stock would result in a $40,000 capital gain. By donating the stock directly, the donor avoids paying taxes on that gain and can claim a deduction for the entire $50,000. Financial adviser Keith Spencer, founder of Spencer Financial Planning in Spokane, Washington, emphasizes this strategy as a smart financial move.
The strategy of donating appreciated assets is particularly relevant given the current economic climate. According to the latest Bank of America Study of Philanthropy, 87% of affluent donors express that charitable giving brings them joy. With inflation impacting many households and increased demand on nonprofits, making informed giving decisions can amplify the impact of charitable contributions.
Utilizing Donor-Advised Funds for Strategic Giving
One effective method to optimize charitable giving is through a donor-advised fund (DAF). This type of fund acts as a “giving account,” allowing individuals to contribute now and recommend grants over time. Major players in this space include Fidelity Charitable, DAFgiving360, and Vanguard Charitable.
According to Ted Hart, author of *The DAF Revolution*, DAFs offer flexibility and strategic advantages, allowing donors to time their contributions with high-income years for maximum tax benefits. They also simplify the donation process by managing verification and paperwork, making them accessible to a wide range of donors, including middle-income and mass-affluent families.
Financial adviser David Johnston from One Point BFG Wealth Partners in Parsippany, New Jersey, notes that DAFs empower families to engage in philanthropy meaningfully. Clients can involve their family members in decision-making regarding donations, fostering a culture of giving and shared values.
The benefits of donating stocks instead of cash are clear and compelling:
1. **Bigger impact, same gift**: Charities receive the full market value of the donation.
2. **Eliminate capital gains tax**: Donors avoid taxes on appreciated assets.
3. **Increase your tax deduction**: Donors can claim the full fair-market value of the donation.
4. **Keep your portfolio healthy**: Donating appreciated shares helps rebalance portfolios without triggering taxes.
5. **Pair with a DAF for maximum flexibility**: Fund a DAF with appreciated shares to distribute over time as desired.
As the holiday season approaches, it is essential to prioritize thoughtful planning in charitable giving. Donating appreciated securities and utilizing DAFs can transform traditional practices into more effective strategies that benefit both donors and recipients.
In conclusion, charitable giving is an integral part of many families’ values. By donating smartly through appreciated assets, individuals can support a greater number of causes while involving their families in meaningful discussions about philanthropy. This approach not only enhances the impact of their generosity but also helps manage long-term tax obligations effectively. As a retirement coach with RetireMentors, I encourage clients to consider these strategies to make charitable giving a lasting legacy, ensuring that their contributions align with their financial goals.
