Like so many aspects of 2020, Thanksgiving will look different. Health concerns or travel limitations mean the crowds around dinner tables will be smaller than usual at many gatherings. Many of us will exchange greetings over video conference rather than in person. While these circumstances present challenges and disappointment, we will still take time to be thankful. We’ll be thankful for those who do break bread with us. We’ll be thankful for those who are with us in spirit if not body. We’ll be thankful medical science may offer solutions that help make Thanksgiving 2021 look more like Thanksgivings past.
One way we give thanks for our own good fortune is by giving to organizations that help those in need of food, shelter, medical care, a helping hand or any manner of assistance. We also give thanks by giving supporting institutions that make our communities stronger.
Cash is always a welcome gift, as those organizations know how to put cash to work efficiently and effectively. For investors who do give, however, we recommend they at least consider gifting appreciated stock instead of cash.
First and foremost, gifted stock benefits the institution, as they can turn the holdings into cash. If the organization has 501(c)(3) or tax-exempt status, they can turn the stock gift into cash without any tax consequences. Gifting appreciated stock, however, can also benefit the investor contributing the shares from a tax-efficiency standpoint.
For investors who itemize deductions on their personal income tax return, they can deduct the full market value of the holdings they gift from a taxable account. For example, an investor who has owned Apple stock for ten years or more may have a cost basis well under $10 per share. Turning those shares into cash for the investor would potentially expose over $100 per share to capital gains taxes. On the other hand, donating those shares to an eligible entity would allow an investor to deduct the full market value of roughly $120 per share, and the entity could then turn those shares into cash with no tax consequences. Even if an investor doesn’t itemize deductions, there’s still a tax-efficiency in the charity or other entity having access to the full market value of the gift tax-free. In addition, gifting provides a tax-efficient way to pare down concentrated stock holdings.
Investors can also consider making a Qualified Charitable Distribution (QCD) of cash from a traditional Individual Retirement Account (IRA) if the account is subject to a required minimum distribution (RMD). The QCD option is still available in 2020 despite RMDs being waived for the year under the CARES Act. Under most circumstances, accessing the assets within an IRA entails paying income taxes at the applicable rate on the amount withdrawn. With a QCD, however, an investor can pull cash from an IRA tax-free and gift that amount to an eligible entity. The ability to access IRA assets tax-free still makes the QCD option attractive in 2020 even with this year’s RMD waiver. Year-end IRA distribution summaries may or may not specify a withdrawal as a QCD, but investors will want to ensure they mark “QCD” next to the amount they identify to the IRS as a tax-free withdrawal.
There’s no hard and fast framework that says when investors should gift stock instead of cash. We suggest, however, that each investor at least explore whether it makes sense in their particular circumstances or in a particular year. We routinely discuss this option with clients when they mention donations they’re considering, and we’re happy to have those conversations. Gifting appreciated shares can offer a very tax-efficient way to donate to efforts investors support or want to express their gratitude toward.
Thanksgiving will look different this year, but we still have many aspects of our lives and many people in our lives to be thankful for. This November, we’ll also be thankful the calendar almost says 2021.