By Stephen Hassell, CFP®
Hi, my name is Stephen Hassell. I'm a financial planner with Hassell Wealth Management, and today's topic is about gifting appreciated shares. So, if you're currently making charitable contributions and using cash, but you also have a non-retirement—often referred to as a taxable or non-qualified—investment account with any investments that are greatly appreciated, you probably want to pay close attention to this video as a way to get a double tax benefit for your charitable gifts.
So, in this top table right here, I'm just simulating a sample portfolio with Stocks A, B, and C. And at some point in time, you paid a particular price for a stock. I'm going to kind of zone in here on Stock C, given it’s the most appreciated. So this particular stock was purchased for $25,000. The current value is 75,000. So there's a $50,000 gain, or 200%.
And basically, if this investment were to be sold for any reason—just because you want out of it or maybe you want to diversify, something like that—that's quite a bit of gain you would have to realize in your investment portfolio, in this example anyway.
And so if, let's say for example, you wanted to make a charitable gift of $75,000, but you were using cash to do it. You could instead take that cash from your checking account or savings account, deposit that money into this investment account, and take Stock C and transition it out to the charity of your choice. Or if you're using a donor-advised fund or some other vehicle like that, you're able to get that out.
What that essentially does—and we'll go through the math here in just a minute—is shelter this entire $50,000 gain from taxation that gets transitioned over to the charitable entity. And generally speaking, they will not pay tax on that.
So you get the same dollars at work, but you save yourself taxes in the meantime. And this would apply on individual stocks, bonds, mutual funds, exchange-traded funds, different investment products like that.
I am going to make some certain assumptions here. Obviously, your specific tax data may differ quite a bit, but I'm going to assume for this example that your ordinary income tax rate is 37%. That's the highest tax rate. So you could be potentially getting that much in a federal deduction when making charitable gifts,
I'm going to look at the federal tax. I should actually edit this—call this capital gain tax of 20% because that's the maximum long-term capital gain tax. And then we're in the state of Louisiana—maybe I should clarify that—at 6%. So these factors are going to come into play here in just a minute.
So when you gift cash, you are gifting—in this case, we're using this example $75,000 federal tax savings. You're going to get that ordinary income tax benefit at the federal and state level. And there won’t be any capital gains avoidance because, of course, you're not gifting appreciated shares. But we end up with a total tax savings of about 32,250. Now the charitable organization or your donor-advised fund, if you're using a vehicle like that, receives 75,000. And the tax benefit to you for doing that, it's about 32,000. So 75,000 does go to work for you.
Now, on the other hand, if we want to take a look at an example of gifting appreciated shares—so same desired gift amount of $75,000, same federal tax savings amount of 27,750 at the top rate. And we've got this state tax savings as well as capital gains tax. So that would be the 6% state in this example, plus the 20% federal. So we've got additional tax savings here of about $13,000. So now your total tax savings are about $45,000, and the same $75,000 got put to work.
Now, the key for all of this happening is that you do this when you were thinking about gifting cash, because the important part, if you were to go ahead and gift out Stock C but then keep your $75,000 in your checking account or savings account, well, Stock C may very well earn more over time than cash, which currently is probably earning nothing. And so it's very important to do that cash replenishment.
So if we were going to give cash, but instead we say, all right, I like this additional tax savings from the capital gains tax avoidance by gifting appreciated shares at the same time, or roughly the same time, that you're making that charitable gift out of the account to the charity of your choice, you would ideally be depositing $75,000 in cash and could literally purchase Stock C all over again. And your basis, the price paid, would equal $75,000. And the current value would be whatever it is at that time.
So you've effectively eliminated that gain, received a larger tax benefit, and still put the same amount of dollars at work from a charitable perspective.
There are a few little nuances that would be important to factor in and take into account here. So we do encourage you to work with your financial planner or accountant to kind of fine-tune this because there are certain gross income limits to the deductibility for appreciated shares—but hope this helps introduce you to the concept. And if you think this may work well for you and you’re a client, speak with us. if you're not a client but interested in learning more, please schedule a discovery call on our website and/or reach out to us by email. Thanks for listening.
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