A Win/Win Situation - Gifts of Stock

May 1st, 2019

This article was originally published by The Arc of the United States on May 1, 2019.

With stock market indices close to historic highs, many investment portfolios include stock with large built-in gains, the sale of which would lead to an increased tax bill. Individuals who own appreciated stock and who want to give to charity might want to consider gifts of stock rather than cash.

Imagine a donor who purchased stock at $20 that is currently worth $100. If the donor sold that stock, after paying capital gains taxes she would likely have $80 or less to donate to charity – and would only be able to take an $80 (or less) income tax deduction on the gift of the after-tax proceeds to charity. If, however, the donor gifted that stock directly to the charity instead of selling, she would be eligible for a $100 income tax deduction. Meanwhile, the charity would receive $100 upon its sale of the stock because it is a tax-exempt organization and would not need to pay any capital gains tax. The end is result is a win/win: the charity has more resources available and the donor receives a larger tax benefit.

Similarly, donors older than age 70 ½ who hold invested assets in a traditional Individual Retirement Account (IRA) are likely to receive an outside tax benefit from donating to charity directly from their IRA rather than taking a distribution from the IRA and then giving to charity. Distributions from an IRA to the account holder are taxed at higher ordinary income rates rather than at lower

capital gains rates – and the entire amount of the distribution is taxed, not just the capital gain portion. If instead a donor contributes to charity directly from her IRA, the donor will not be taxed on the distribution and, if the donor is over 70 ½, the amount of the donation will be considered part of their Required Minimum Distribution for the year in which the donation is made. People who are age 70 ½ or older can make up to $100,000 of this type of tax-advantaged contribution to charity from their IRA each year.

Consider that donor with $100 of stock – only this time imagine that she put $20 in an IRA, and it has grown to be $100 in the years since she made the contribution. If she takes a $100 distribution from her IRA and is taxed at the top federal ordinary income tax rate of 37%, she will have to pay the $37 of tax and will only have $63 left to contribute to charity. Meanwhile, the charity will receive only $63 of benefit. If she makes contribution of stock directly from her IRA to the charity instead, the donor will owe $0 in tax and the charity will benefit from the full $100 distributed from the IRA. Once again, making a tax-efficient donation benefits both the donor and charity.

Want to know more about giving stock? Please contact The Arc of Essex County’s Senior Director of Development and Communication, Heather Comstock at hcomstock@arcessex.org. Potential donors are encouraged to consult with their tax or financial advisor.