If you regularly donate to charity and have a taxable investment portfolio (like a brokerage account), you might be missing out on a powerful strategy to make the most of your gifts, maximize your deductions, and reduce your future tax liability.
Typically when people donate money to charity, they just put a check in the mail and call it good.
But there's a better way to do it if you have investments with long term capital gains. Maybe you bought $1000 of an index fund back in 2014 and it's grown into $3000. If you sold that investment, you would owe capital gains tax on that $2000 gain. For a lot of people, this would be taxed at 15% federally, plus 8.75% for Oregon, for a total of 23.75%. On a $2000 gain, that works out to a tax bill of $475. Of course, higher income people would expect to pay more, and lower income people would expect to pay less.
But what if you didn't have to pay that tax? Ever.
Rather than donate $3000 to charity in cash, you can instead donate $3000 of investments and still still claim the full $3000 deduction on your taxes. Do not sell your stock before donating, just gift the shares directly.
Now, maybe you weren't planning to sell the stock to make your gifts, especially if you normally do your giving via check or cash. Well, you'll still sell your investments someday, right? Doesn't it make sense to minimize your tax bill for when that day comes? To accomplish this, all you have to do is transfer the $3000 of cash over to your investment account and invest it.
Rather than hold a $3000 position with a $2000 gain, you'll instead have a $3000 position with zero gain.
It gets even better.
If that new investment goes down in value, you can sell it for a loss and write off those gains against your income. Maybe it drops from $3000 to $2500 in value. That produces a $500 deduction when you sell it. Then you'd just buy a new (but not identical) investment with that $2500. As that investment grows, you'll be able to do another round of gifting.
Let's compare these two scenarios.
Scenario One: You gift $3000 cash, and keep holding your investment. You get a $3000 deduction, but continue to hold deferred capital gains of $2000. The $3000 write-off reduces your taxable income today by $3000, but the capital gains that remain will increase your taxable income by $2000 when you sell them. If you net these out against each other and assume a 23.5% tax bracket (state and federal combined), you're only $235 ahead.
Scenario Two: You gift $3000 worth of investments, and use your cash to buy a new investment. You get a $3000 deduction, carry zero tax liability, and in the scenario where your investment drops, you get an extra deduction of $500. So your total total deduction is $3500. With that 23.5% tax bracket, you're $822.50 ahead. That's a $587.50 improvement over the cash gifting scenario.
Notes and Disclaimers:
Most of the charities I've seen are set up to handle this and don't have a problem with it at all, but it's worth a call to make sure they can accept the gift in stock as opposed to cash.
These benefits aren't totally free. You (or your advisor) have to do a little bit of legwork. You'll need to find the account information of the institution receiving the gift, and you'll have to submit a form with your investment custodian to execute the gift. Because of that, I wouldn't recommend this strategy for gifts of less than $3000 or so. But you can decide what's worth it for you personally.
These examples are for illustrative purposes only, and not specific tax advice for you. Consult an advisor for help with this math and implementation. For the sake of getting my point across, I've made some gross oversimplifications in my calculations. The principle still works if you do the math right, though.
Lastly, there are limitations around how much of this you can do. One is that you can't claim a deduction for more than 30% of your Adjusted Gross Income for gifts made with appreciated stock. If you have AGI of $50,000, you can only claim $15,000 worth of deductions for stock gifts. You can't bring your income tax down to $0 with this strategy (nor would you want to, but that's a topic for another article).