When you donate securities to charity, the value that’s deductible on your tax return may differ slightly from the price you intend give to charity.
The market value used by the IRS to determine the tax deduction is based upon the average of the highest and lowest trading prices on the date the investment is transferred to charity.
Betterment helps you easily donate shares to charity by suggesting the tax-optimized value of your appreciated shares.
Many taxpayers are familiar with the fact that 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.
The dollar amount you can deduct on your taxes requires a valuation of whatever you’re donating. Cash, of course, is 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’s usually some 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 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 that 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 the 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 is often 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 of saving on capital gains tax by donating appreciated shares and then being able to deduct that value to lower your taxes even further, generally exceeds any differences in valuation during the day of transfer.
How Betterment Manages Your Tax-Deductible Donation
By making a donation of appreciated shares using Betterment, you’ll never have to handle the process of converting the amount you want to give into a certain number shares. That part works in the background.
Betterment also makes sure 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 properly claim deductions 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 here.
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