March 19, 2013

Appreciating Appreciated Securities


Credit: David Castillo Dominici
If you have not started preparing your 2012 taxes, consider this your reminder. If you have already prepared your 2012 taxes, did you have any charitable deductions? If you did, I may have an idea for you to consider in 2013.

Giving cash or clothes to churches, charities, or other qualified organizations is a very admirable gesture in my book. You are sacrificing to help others who are less fortunate. In addition to the good feeling you will probably experience from your generous gifts of cash, clothes, shoes, or books, the U.S. Tax Code will also likely allow you to take a charitable deduction that could potentially lower your income tax bill. It seems like a win-win situation, but it could be even better; the U.S. Tax Code also offers tax benefits to those who gift stock, particularly appreciated stock (stock that has gone up since you bought it), to charitable organizations.

How could giving stock be better you ask? Let me give you an example of one of the best tax planning “tricks” in the book!

Example: Bob and his wife Susan want to give $10,000 to the Salvation Army. They have some extra cash laying around, their closets are overflowing with clothes and shoes, and they have a considerable amount of Home Depot stock in a brokerage account Bob has been adding to over the years. Bob knows he could write a check to the Salvation Army like he does every year, he and Susan have needed to go through their closets for longer than they’d like to admit, and Bob remembers his friend Steve talking about what a “great deal” he got by giving his church some stock last year, but what should Bob do?

Bob and Susan can obviously give anything they choose in any manner(s) they choose, but here are the likely results of their three different options:
  • Cash: This is probably the easiest and quickest way to give. Write a check, donate online, pay by credit card - whatever. You will help a charity and likely get a tax benefit. You will need to keep good records though (see “Records to Keep, Cash Contributions”).
  • Non-Cash Items: While this is a great way to clean out your house and instantly provide gently used items to those in need, it will require more effort both when you clean out your closet and when you file your taxes. The number of hoops you will have to jump through  (see “Records to Keep, Noncash Contributions”) in order to claim a charitable deduction grows as your non-cash donations increase from less than $250, to between $250 and $500, to between $500 and $5,000, and above $5,000, so please keep this in mind if you choose to donate non-cash items. I’m not saying this isn’t a good way to give charitably, and I’m certainly not giving you another excuse to neglect your overflowing closet, but I am saying that you might want to box up your stuff and give $500 or less of non-cash items per year so that you don’t have to remember the day you bought a sweater and how much you originally paid for it, pay your CPA more to fill out another very detailed tax form, or even have to consider bringing in an appraiser. 
  • Stock: As I mentioned earlier, Bob has a brokerage account with a lot of Home Depot stock in it. While he’s bought additional shares from time to time, he bought most of the shares on August 17, 2000, for $51.37 per share. Considering Home Depot closed at $71.37 per share on March 8, 2013, that means he has unrealized gains of $20 per share on most of his shares. If Bob and Susan want to give $10,000 to the Salvation Army, and Home Depot is at a price of $71.37 per share, Bob will need to transfer about 141 shares to the Salvation Army ($10,000 / $71.37 = 140.11 shares). Transferring these shares will likely require a call to his broker or financial advisor (and maybe even the Salvation Army) and some paperwork, so this is more complicated than just writing a check, but this is the strategy I would probably recommend for Bob, and here is why:
    • If Bob transfers 141 shares of Home Depot to the Salvation Army, he and Susan will probably be allowed to take a charitable deduction for the current fair market value of the stock at the time of the transfer ($71.37 per share in our example) of around $10,000. That’s just as good as giving cash!
    • If Bob transfers 141 shares of Home Depot to the Salvation Army, he and Susan will not have to worry about any of the long-term capital gain taxes they would have encountered had they sold 141 shares of Home Depot stock and then given the cash to the Salvation Army, or used the cash themselves. Assuming Bob and Susan would have faced the 15% long-term capital gain rates, by giving the stock directly they saved themselves around $423 in taxes [($71.37 fair market value price - $51.37 purchase price) x 141 shares x 15% tax rate]. If they were higher-income taxpayers and faced the new 23.8% long-term capital gain rates, they saved themselves around $671 in taxes [($71.37 fair market value price - $51.37 purchase price) x 141 shares x 23.8% tax rate]. Those tax savings make giving appreciated securities better than cash!
    • Now that Bob has $10,000 less of Home Depot stock than he might want, he can take $10,000 worth of his excess cash and purchase some new Home Depot shares. He would once again own around the same amount of Home Depot stock, and his new shares would have been purchased at around the current fair market value price of $71.37 per share. That means if Home Depot’s stock price continues to rise and he ever decides to sell the stock in the future, the gains on his new shares would only be based on stock price appreciation above his $71.37 purchase price - not the $51.37 purchase price of the shares he gave to the Salvation Army. Those potential, future tax savings could be worth something as well! (Of course, Bob could also decide not to use $10,000 of his excess cash to replace the Home Depot shares, and he could add those funds to his prudently diversified portfolio, but that’s for a different day…)

If you give charitably, I applaud you, and I hope you will keep on giving. If you currently don’t give charitably, please look after you and your family first, but I hope you will one day consider it. Either way, after today’s post, it is my goal that you now appreciate your appreciated securities a little bit more, and will consider the potential tax benefits of making stock gifting part of your charitable gifting strategy in 2013.


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