When you gift a security, there can be a difference between the gifted price and the amount you can deduct on your tax return.
If you itemize your deductions on your tax return, you can deduct the value of charitable donations. To be more precise, you can deduct the value of any assets you give to registered charities. Donations include all kinds of valuable assets—money, food, clothing, property, and of course, securities like stocks and bonds.
In order to include itemized deductions on your return, your itemized list must exceed the standard deduction, which has been set at $12,950 for single individuals and $25,900 for married couples filing a joint return, for the 2022 tax year.
Keep in mind that this dollar amount could change in future tax years. Your itemized deduction list includes more than your charitable gifts; it also includes any mortgage interest, state and local taxes, and medical expenses as well. Therefore, if you’re trying to deduct charitable gifts, it may be wise to consider a “bunching” strategy to make multiple years’ worth of charitable gifts in a single year to help exceed the standard deduction.
It’s worth noting, of course, that even if you are not entitled to a deduction, you may still receive a tax benefit when donating appreciated securities in the form of capital gains taxes avoided on the appreciation.
The dollar amount you can deduct on your taxes requires a valuation of whatever you’re donating. Cash, of course, can be easy to value: When you donate a fifty-dollar bill, you can deduct $50 on your tax return. Personal property like clothing or food is a little bit more difficult, but the IRS has guidelines on valuing those items. With securities—i.e. stocks and bonds—the process is also very straightforward, but it involves a set of rules. In this article, we’ll review exactly what those rules are.
When you gift a security, there can be a difference between the gifted price and the amount you can deduct.
When you gift your security holding to a charity, you’ll do so at a certain point in time, with an associated price. Investors are most tax-efficient when they only donate shares that they’ve held for at least one year because, in that case, the IRS allows you to claim a deduction for the whole, appreciated value. However, the price at the time of your gift will not necessarily be the same value that’s deductible on your tax return.
This difference arises from IRS rules that state that the deductible amount for your tax filing must be the fair market value. And the IRS has a specific way of determining this value:
On the day of the transfer, if you’re gifting $1000 worth of shares, then a precise number of shares must be chosen to equate to $1000. As an example, we’ll use 20 shares worth $50 each.
The IRS says that the fair market value is equal to the average of the highest price and lowest price on the day of the transfer. So, if during the day of your donation, the shares trade at a high price of $51 and a low of $47, then the fair market value of all twenty shares is $980.
This $980 is the value that’s deductible when you file your taxes for the year. And that value of your donation holds true regardless of however much the charity ultimately sells the 20 shares for. The lesson here is that even as you plan to gift securities and reap the tax benefits of doing so, the value you plan to donate won’t necessarily always match the exact value you can deduct on your taxes.
This scenario can be an area of confusion for people looking to gain the tax benefits of donating to charity. While the numbers may be slightly lower or higher than you initially expect, the value lies in saving on capital gains tax by donating appreciated shares and then being able to deduct that value to lower your taxes even further.
How Betterment Manages Your Tax-Deductible Donation
By making a donation of appreciated shares using Betterment, you may avoid the process of converting the amount you want to give into a certain number shares on your own. That part works in the background.
Betterment also aims to ensure that you only donate appreciated shares that you’ve held for one year or more—which is advice that protects you from gifting shares away that have lost value or that you would not be able to deduct fully on your tax return.
In short, Betterment’s focus on charitable giving is part of helping you tax-optimize your investments. As Henry Ford once stated, “the highest use of capital is not to make more money, but to make money do more for the betterment of life.”
Betterment’s not a tax advisor, so as you make your charitable donations and look at how to claim deductions properly on your tax return, it’s best to consult a tax professional. For more information on Betterment’s charitable giving feature, check out the full explanation.