It's well known that giving money to charity is a great way to reduce your taxable income, as well as support charitable organizations. This is a great thing to do, and ranks high on my list of ways for people to enjoy their money. After all, you feel great about helping improve the world, and you even enjoy greater well-being for having done so.
In my experience, most people simply give cash, whether by one-time check or by a recurring monthly deposit. But from a financial planning perspective, there's an even better way to do this, which lets your money go further towards supporting charitable endeavors, and reduces your tax bill even further. Talk about a win-win.
The improved strategy involves gifting appreciated shares of stock directly to a charity (or donor advised fund), rather than selling shares and donating cash. The benefit of doing so is three-fold. First, you can claim the full market value of the gift, not just what you originally paid for the stock. Second, you've removed a deferred tax liability from your portfolio. Normally, if you sold those shares, you'd have to pay capital gains taxes. But once the shares leave your hands, that liability is no longer your problem. Third, you keep the tax man out of it; your money goes straight to the charity of your choice. And to bring this full circle, you can then use the cash that you would have donated to buy new shares of stock at a higher cost basis. Your portfolio exposure remains the same, but your tax liability is reduced.
To summarize: By gifting shares of stock, you get a deduction for the full market value of the stock, you get rid of a gain that you'd owe taxes on later, and your portfolio now has a higher cost basis than it did before.
To receive these benefits, there are a few requirements and limitations. Nothing particularly onerous though.
Requirements:
The shares being gifted have to have been held for more than one year, such that they are eligible for long-term capital gains treatment.
Gifts must be made to an eligible organization, this isn't some loophole that lets you deduct gifts to your children.
You need to file special paperwork to make the gift, as well as file a form 8283 on your taxes. This isn't particularly onerous though.
Limitations:
When claiming deductions, you can only claim up to 30% of your AGI (Adjusted Gross Income) when using this method, compared with 50% of AGI for cash gifts.
If you're taking the standard deduction on your taxes, you may not see the benefit of smaller donations. You'll still get the portfolio benefit, though, which is worth it by itself, in my opinion.
Implementation:
Really, there are two components. One, as with any taxable portfolio, you want to harvest any losses that arise to offset gains and income elsewhere in your finances. Two, you want to maximize the benefit of gifting by giving shares with large percentage gains. Effectively, you want a portfolio with several big winners, and many small losses. Luckily for you, this is exactly what the stock market tends to produce over time.
In other words, if you buy a portfolio of 50 individual stocks, what tends to happen is that many of them will produce either negative returns or low returns relative to the market average. Meanwhile, a small number of your investments produce gains that are large enough to make up for all the losers. That's not unusual, that's just the nature of equity investments.
For an extreme example of this, look at the expected return profile of Venture Capital funds. In these portfolios, which are arguably the purest form of equity investing, the expected result is for 8/10 companies to go to zero, 1/10 to break even, and for that remaining 1 company to produce big enough returns to make up for all the losers. The same pattern applies in public markets, albeit in a less extreme manner. Systematically harvesting small losses produces a tax benefit and helps keep them from becoming large losers that drag on your portfolio, while allowing the "winners" to do their work producing large, concentrated gains.
Over time, such a portfolio will tend towards increasing concentration a small number of companies. Ordinarily, that's a risk that I would want to help a client mitigate. However, in this case, it's a feature, not a bug. An investment with large percentage gains (ideally well over 100%) is ideal for gifting because it maximizes the benefit of donating stock rather than cash. Using individual positions is useful because it concentrates your portfolio's gains in specific, gift-able positions, while keeping the capital gains relatively low elsewhere in your portfolio.
On top of this, you get a tax benefit not only from gifting your winners, but from harvesting your losers. Realized losses can be used to offset gains elsewhere, and even offset some ordinary income.
Finally, you can replenish the portfolio's diversification by using cash that would otherwise have been used for direct gifting. That's how you run a gifting portfolio for maximum benefit.
Let me stress though, that managing this portfolio is not about trying to find the next Amazon/Tesla/Apple or trying to beat the market. It's about achieving broad diversification in a large number of securities such that your returns should approximate the market averages over time. We won't know in advance which ones will be the winners, and which ones will be the losers, or even over what time frame their divergent fates will play out. But we can be reasonably confident that a basket of high quality companies will produce satisfactory returns over time.
For guidance on how to put this together in a way that makes sense for you and your financial situation, give me a call. I'll be happy to answer any questions you might have, as well as to set this up for you.