Do you give to charity? Do you also have securities such as common stocks, mutual funds, or exchange-traded funds that have gained in value? If so, consider the advantages of giving marketable securities (instead of cash) to your favorite charity.
For example, let’s say that you purchased an asset for $3,000 in 2009, and today it is worth $10,000. You have an “unrealized gain” of $7,000. When you sell this asset the entire gain is taxed at 15%. If you sold your asset today, $1,050 would go to the IRS, leaving you with only $8,950.
Now, let’s also assume that you normally give $10,000 per year in cash to your favorite charity. Simply by changing your method of giving, you can easily keep $1,050 in your pocket (and away from Uncle Sam). Since non-profits are not subject to the capital gains tax, they get to keep the entire $10,000 when they sell the asset. The entire market value of the gift ($10,000) is tax-deductible to you.
Here’s how it works:
- Contact the charity and ask them if they accept gifts of marketable securities. If so, ask for “delivery instructions”. This will allow you to electronically transfer your shares to their account.
- In determining which assets to give, look for securities held longer than 12 months with the most appreciation.
- Send your brokerage company a “letter of instruction” informing them of your desire to transfer shares to your chosen charity.
- Make sure that the charity knows what you are doing so that they can send you a “gift letter” for tax purposes.
- If you still want to own the security that you gave away, go ahead and purchase it with the cash that you were going to give to charity. Your cost basis will be $10,000 (instead of $3,000) and when you do eventually sell it, your tax liability will be less.
In addition to marketable securities, you can also give land, gold, and art, to name a few. Sometimes we own assets that were given to us by a relative and we’re unable to determine the cost basis–these are great charitable giving candidates. Before making any commitment, always check with your financial advisor or accountant to make sure that giving non-cash assets is the best strategy for your particular situation.