With equity market returns at eye-popping levels over the last several years, many investors hold securities that have appreciated in value. That’s good news, but selling those securities can potentially mean higher taxes. Yet again, there’s a positive: If you have held your appreciated securities for more than one year, you can donate them to charity and not only claim a tax deduction for their full fair market value but also avoid capital gains tax.
US equity markets have returned 346% since the bottom of the bear market in March 2009. They were up 94% just over the last five years, August 31, 2012, to August 31, 20171. With those kind of returns, investors are increasingly donating appreciated securities.
For example, over the last five calendar years, 58% of the total contributions to donor-advised fund Vanguard Charitable were appreciated securities—stocks, bonds, mutual funds and ETFs. In the June 2016 to June 2017 period alone, 64% of contributions were appreciated securities, compared to 55% in the same period the previous year.
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Tax treatment of appreciated securities
The tax treatment of a gift of appreciated securities will differ depending on the type of securities donated, along with other factors. Please consult with your tax advisor before making a decision.
| Valuation of appreciated securities | Tax benefits of appreciated securities |
| Mutual funds: Value is based on the closing price (net asset value) on the date the donor relinquishes control of the donated shares, multiplied by the number of shares donated. Stocks, bonds and ETFs: Value is based on the average of high and low selling prices on the date the donor relinquishes control of the donated shares, multiplied by number of shares donated. | If gifted during the donor’s lifetime: · No capital gains tax.· Up to 30% of AGI if valued at fair market value (FMV). Contributions above AGI limit can be carried forward for up to 5 years.· To claim deductions up to 50% of AGI, donors can choose to deduct cost basis for donated appreciated securities. However, if they make this election, they must also base deductions on cost basis for any other donations of appreciated securities or property during the same tax year or carryforward period. Special tax rules will apply. If gifted as an estate bequest: Estate tax deduction for full market value of donation at death. |
The right time to donate appreciated securities
If you hold appreciated securities and are considering donating them to charity, you might be wondering when you should make the contribution. After all, the market may keep going up and you might capture even more value. On the other hand, the bull market can’t go on forever and a market reversal could pull down the value of those shares.
Either way, charities stand to gain. So the answer depends on a number of factors, including the need for portfolio rebalancing and personal charitable goals (i.e., to make a large gift at a designated time or to fund a specific purpose for a charity). It’s a good idea to discuss these considerations with your advisor before you give.
In particular, rebalancing your portfolio can be an ideal time to gift appreciated securities. Rebalancing is buying and selling securities in your portfolio to bring it in line with your preferred asset allocation (the way you divide your portfolio among asset classes to balance risk and return). Rebalancing is generally recommended when your asset allocation is 5% or more away from your target allocation. Rather than selling appreciated securities when you rebalance, consider donating them instead. It can be good for your portfolio, your tax bill, and your favorite charity.
While many donors associate contributing and granting with the end of the year, charities need support year-round. Unless there’s a reason to sell late in the year, you can enable your charities to put the money to work sooner by donating these securities at other times. In fact, Vanguard Charitable research shows that 96% of charities prefer to receive donations throughout the year rather than at year-end. A steady flow of donations helps charities better manage cash flow, continue providing services outside of seasonal giving periods, and complete work driven by needs, not the calendar.
Make sure your charity has the sophistication to accept appreciated securities
Gifting appreciated securities is more complex than contributing cash. Larger nonprofits might have the capability to easily handle appreciated securities, but many smaller organizations may not.
So as not to create a burden on a charity by giving it appreciated securities it isn’t equipped to handle, many donors instead contribute the securities through giving tools such as a donor-advised fund. That easily enables them to use the proceeds from the sale for granting to multiple charities over time.
Learn how a donor-advised fund can support your client’s charitable giving at year-end. Visit www.vanguardcharitable.org/yearend
¹Source: Vanguard. Cumulative returns from February 28, 2009, through August 31, 2017, reflecting the MSCI US Broad Market Index through June 2, 2013, and the CRSP US Total Market Index thereafter.
This content was provided by Vanguard Charitable. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.
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