In 2016, I earned my Certified Financial Planner (CFP) designation alongside my friend Peter; we both passed the exam together. Fast forward several years, and Peter’s dedication to his clients has paid off handsomely, with his income reaching $50,000 per month.
During a recent conversation about managing expenses, Peter mentioned his commitment to philanthropy, stating, “I write a $5,000 check to my church every month.”
I paused and asked, “But you don’t write a check, right? You gift stock, correct?”
Peter looked puzzled and admitted he hadn’t considered that approach.
This exchange highlights a significant opportunity for high-income earners to enhance their charitable giving strategies by donating appreciated stocks instead of cash.
Advantages of Gifting Appreciated Stocks:
Avoidance of Capital Gains Tax: Donating appreciated securities held for more than a year allows donors to bypass capital gains taxes, which can be as high as 20% for long-term investments. This means the full value of the stock benefits the charity, and the donor avoids the tax liability.
Charitable Deduction: Donors can claim a tax deduction equal to the fair market value of the donated stock, subject to certain income limitations. This deduction can reduce taxable income, providing further tax savings.
Enhanced Impact: By donating stock instead of cash, donors may increase the amount available for charitable contributions, thereby amplifying their philanthropic impact.
Implementing a Strategic Investment Approach:
After donating appreciated stocks, high-income earners can reinvest the equivalent cash amount into their brokerage accounts using a Dollar-Cost Averaging (DCA) strategy.
Benefits of Dollar-Cost Averaging:
Mitigation of Market Volatility: DCA involves investing a fixed amount at regular intervals, regardless of market conditions. This approach reduces the impact of market fluctuations by spreading investments over time, potentially lowering the average cost per share.
Disciplined Investing: Regular investments promote discipline, removing the temptation to time the market and encouraging consistent portfolio growth.
Flexibility: DCA can be applied to various investment accounts, including taxable brokerage accounts, allowing for tailored investment strategies.
Practical Steps:
Identify Appreciated Stocks: Review your portfolio to determine which stocks have appreciated and are suitable for donation.
Transfer to Charity: Work with your financial advisor or brokerage to transfer the stocks directly to the charitable organization, ensuring compliance with IRS regulations.
Reinvest Using DCA: Allocate the equivalent cash amount into your brokerage account, setting up automatic, regular investments to implement the DCA strategy.
Considerations:
Tax Regulations: Be aware of IRS rules regarding charitable deductions and capital gains to ensure compliance and maximize benefits.
Recipient’s Tax Implications: If gifting stocks to individuals, understand that the recipient inherits your cost basis and may be subject to capital gains tax upon selling the asset.
Professional Advice: Consult with a financial advisor or tax professional to tailor this strategy to your specific financial situation and goals.
By shifting from cash donations to gifting appreciated stocks and reinvesting through dollar-cost averaging, high-income earners can enhance their charitable impact, achieve tax efficiencies, and maintain a disciplined investment approach.
CITATION PAGE;
Internal Revenue Service (IRS): For detailed information, refer to Publication 526.
Certified Financial Planner Board of Standards (CFP Board): For more information, visit their Charitable Giving page.
Investopedia: Read more at Can I Donate Stock to Charity?.
-Aristotle
Having an honest, trusted, and knowledgeable advisor who can help you make smart decisions and create a path to your financial goals is the best way to secure your future and the future of those you care about.
*Source: CFF Board (cfp.net), February 3, 2022
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