Monetary gifts come in all sizes, shapes, and forms. From a dollar in the donation bucket to the purchase of savings bonds for grandchildren, monetary gifts are a generous expression of support that benefit both the recipient and the donor who shares in the joy of giving.
What many don’t consider, is a 3rd benefit in the form of tax savings, that can be achieved by simply changing the format of your donation.
Instead of gifting cash, consider the option of gifting stock!
Giving To Charity
If you typically support charities with cash, a stock donation could provide even greater benefits to both donor and recipient. Let’s say you traditionally donate $1,000 and must dip into your investment portfolio to raise the cash. With the run up in the stock market, this will likely create a taxable capital gain for you and as a result, the donation ultimately costs you more than the $1,000.
But if you chose to donate stock instead of the cash, you never need to sell that stock and create a taxable event. Instead, you give the stock directly to the qualified charitable organization of your choosing and the potential tax consequence travels with the stock transfer. Since Section 501(c)(3) charitable organizations do not pay capital gains tax, they can sell the stock and reap the benefit of the full $1,000 gift while no taxes are paid by either party.
For charitable donors above 70 ½ you have another great gifting option. Many individuals have saved so well into retirement accounts that they now must take large Required Minimum Distributions (‘RMDs’) that are subject to federal income tax rates. If that money isn’t needed to live, some or all of your RMD (up to $100,000 each year) could be donated to your favorite charity through a Qualified Charitable Distribution, or QCD. The amount of the QCD is then excluded from your taxable income and it counts toward all or part of your RMD for the year.
Giving To Heirs
Legacy planning is another key opportunity for donors to consider stock gifts. Since a charity usually is not involved in generational wealth planning, the IRS provides limits, called the annual gift tax exclusion, for gifts from one donor to each recipient, per year, without using up any of their lifetime gift and estate tax exemption. For 2022, that amount is $16,000. Let’s use an example to illustrate. In a situation where two grandparents would like to give gifts to each of their two grandchildren, each grandparent could give each grandchild $16,000. This would result in $32,000 given to each grandchild ($64,000 total) while avoiding any gift taxes.
Now let’s assume our grandparents have highly appreciated stock in their portfolio that they decide to gift to the grandchildren. Just like when you give to a charity, the tax consequence of the highly appreciated stock transfers from the donor to the recipient. There are still tax considerations for the children if they are minors but there are opportunities to sell some or all of that appreciated stock at lower tax brackets.
Let’s also recognize that tax avoidance may not be the primary driver of legacy planning. A gift of stock to children and grandchildren may provide a fantastic opportunity to educate your future generations about your legacy, the power of compounding, investing, and other great life lessons!
INNOVA is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. INNOVA is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.