Giving the Gift of…..Stock!

This is the time of year that many of us are hurriedly buying gifts for friends and family.  The holiday season also serves as a great time of year to satisfy our charitable intent, through gifts to churches, synagogues and charities.  There are many ways to donate to these organizations, but those of us wanting to achieve both benevolence and tax planning should think about giving the gift of stock.

 It may be “simpler” to just write a check, but let’s explore the advantage of gifting securities (i.e. stock or mutual funds) through this example.

 Stan and Phyliss would like to donate $10,000 to their church to satisfy their annual pledge and they are in the 35% marginal tax bracket.  One choice would be to sell $10,000 worth of a stock in their brokerage account and write a check to the church using the proceeds.  If they purchased this stock back in 2002 for $2,000 they would have a gain of $8,000 on the sale, which would be subject to 15% long term capital gains tax.  That means they pay capital gains taxes of $1,200 on this transaction, while receiving a charitable income tax deduction of $3,500.  The strategy would result in a net out of pocket of $7,700 as shown in the following chart.

Gifting Cash

Gift Amount/Deduction   $10,000
Capital Gains Tax + $1,200
Income Tax Savings –  $3,500
Net Out of Pocket Cost = $7,700

 A better option would be to gift the stock directly to the charity and let them sell it, since charitable organizations do not pay capital gains taxes.  If they use this strategy, Stan and Phyliss will receive the same charitable deduction as before, which results in $3,500 income tax savings.  However, they will avoid the $1,200 capital gains tax resulting in a net out of pocket of only $6,500.

Gifting Securities (i.e. stock or mutual funds)

Gift Amount/Deduction   $10,000
Capital Gains Tax + $0
Income Tax Savings –  $3,500
Net Out of Pocket Cost = $6,500

 Before proceeding, be sure to consult your Woodward Financial Advisors wealth manager (or your tax advisor).  Some restrictions may apply, such as limitations to the amount you can deduct on your tax return in a given year, the type of organization that may qualify, and the type of security.

 As you can see, this method may help you achieve multiple goals, namely helping an organization that is important to you and reducing your taxes.

About Jim Miller

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