As the Year-End Approaches, U.S. Investors Have the Opportunity to Align Their Financial Goals With Their Philanthropic Values. By incorporating charitable donations into their financial plans, they can support causes they care about while also accessing significant tax benefits, notes a report from Vanguard.
Charitable donations can take various forms, from cash gifts to in-kind contributions. In-kind donations refer to non-monetary assets given directly to a charitable organization, such as real estate, artwork, and most commonly, securities.
Donating Appreciated Assets
One of the most effective ways for investors is to donate appreciated publicly traded securities. This involves transferring ownership of stocks, bonds, or mutual funds that are listed on an exchange and have increased in value since their acquisition to a charitable organization. This approach offers many advantages, including:
Greater Tax Efficiency. Donors can deduct the fair market value of their securities on the date of the donation, which may be significantly higher than the original purchase price.
Avoiding Capital Gains Tax. By donating the securities directly to the charitable organization, instead of selling them and then making a cash donation with the proceeds, donors avoid paying capital gains tax on the appreciation.
Larger Donation Amount. Often, donors can make a larger donation using this method than they could by donating cash.
Donating Appreciated Securities: A Simple Process
Investors whose portfolios have overweight positions in certain securities might consider donating them in kind as part of a periodic rebalancing.
Donating appreciated securities is a straightforward process. Investors can work with their financial advisor or directly with the charitable organization to initiate the transfer. It is important to confirm that the charity is equipped to accept securities and that the donated assets are not subject to restrictions or holding periods.
For the donor to deduct the donation from federal income tax, the charity must be a qualified organization under the Internal Revenue Code (IRS). Investors can use the IRS online tool, Tax Exempt Organization Search, to verify the organization’s status.
“When it comes to charitable giving, the benefits of donating appreciated securities are clear,” says Garrett Harbron, Director of Advised Wealth Management Strategies at Vanguard and one of the authors of the research report Fundamentals of Charitable Giving: How to Get the Most Out of Your Donations.
“Donors not only receive a tax deduction for the fair market value of the securities, but they also avoid capital gains tax on the appreciation. This benefits both the donor and the charity,” he adds.
Donating appreciated securities is a strategic way for investors to support their philanthropic causes while also reducing their tax burden. By transferring ownership of these assets directly to a qualified charitable organization, donors can maximize the value of their gift and avoid capital gains taxes.
“Now is a good time for investors to review their charitable giving strategies and see if donating appreciated securities makes sense for them,” says Harbron. “For many investors, it can be a tax-smart way to make a meaningful impact,” the expert concludes.
