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Why donating stock to charity beats giving cash

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      By Rey Santodomingo, Director of Investment Strategy - Tax Managed Equities, Parametric

      Seattle - As the end of 2018 approaches, it's a key time of year for charitable donations.

      Why now? According to a study by the Network for Good of donations made through its platform, in 2015, 29% of all giving occurred in December, and more than 11% took place in the final three days of the year. That's some pretty stellar procrastination. However, if investors want to make the biggest impact on the cause of their choice -- and cause the least tax impact to themselves -- now is the time to plan and execute their end-of-year charitable-giving strategy.

      That's because one of the best ways for investors to give charitably is by donating stock -- not sending cash.

      Reason 1: Like cash, donating stock to charity is tax deductible

      Charitable donations are deductible only for those taxpayers who itemize deductions. But thanks to the tax-law change, for 2018 the hurdle for itemization is now higher: The standard federal deduction has doubled, to $12,000 for individuals and $24,000 for married couples filing jointly.1

      But high-net-worth investors with appreciated portfolios may have little difficulty stepping over this hurdle. Two possibilities are itemizing deductions for other purposes or making sufficient charitable donations to clear the standard-deduction bar. Either way, this deduction remains a powerful way for those with the means to do so to help themselves while also helping the organizations they choose to support. And the deduction is typically the same whether the donation is made in cash or stock. Investors should keep in mind, however, that a donation in appreciated stock must be limited to 30% of their adjusted gross income (AGI).2

      Reason 2: Donating stock takes tax liability out of the portfolio

      Having a highly appreciated position in a portfolio may be great...until the investor is ready to sell that position. Then, given a potential 23.8% federal capital gains tax bite (if we factor in the 3.8% Medicare surtax that applies to high earners), it may not be so great, depending on one's appetite for tax liability.3

      Donating the highly appreciated stock to charity may remove that liability, enabling investors to make their desired donation, deduct the value of the donation from their AGI, and generally not having to worry about the capital gains tax they would otherwise have had to pay if they'd sold the stock.

      Another option would be to set up a donor-advised fund. This allows the investor to move appreciated stock into a fund without any of the typical tax penalty, then decide over time how to donate assets in the fund to charitable organizations.

      Reason 3: There's a better use for cash

      Donating stock from a portfolio, then depositing into the portfolio an amount of cash equal to the value of the stocks gifted sets the investor up for future tax-saving opportunities. For example, the investor can use the deposited cash to purchase stocks that allow the portfolio to maintain the investor's chosen market exposure but that have a higher cost basis than the gifted shares. This higher-basis investment increases the potential for eventual tax-loss harvesting, which should help reduce future tax payments.

      Reason 4: Donating stock increases the size of the gift

      We saved the best reason for last. Many investors sell stock to raise cash for charitable donations. Yet when you donate stock to a charity instead, you get the added benefit of receiving a tax deduction for the stock's full fair-market value. As the below example demonstrates, this approach can also represent an increase of over 10% in the size of the gift as opposed to selling the shares and then donating the cash, since you avoid the payment of capital gains tax incurred when selling the shares.

      Blog Image Stock Donating Dec 4

      Source: Parametric

      1Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% plus the 3.8% Medicare surtax, for a total rate of 23.8%. Does not take into account state and local sales tax, if any apply.

      The upshot: Donating stock means you can end up not only donating a higher dollar amount to your favorite charity but also increasing your charitable tax deduction in the process.

      Bottom line: Making charitable gifts in cash is a natural instinct for many people. After all, cash gifts may lessen an investor's current tax bill by reducing taxable income by the amount of the gift (subject to limitations, of course). But cash gifts aren't the only option. And, for the reasons listed above, they may not even be the best option. Charitably minded investors with appreciated positions should consider donating stock. Because sometimes the kindest donations are the ones made in kind.