CAN’T PART WITH A FAVORITE STOCK?
December 14, 2016
Generally speaking, it’s better for US taxpayers to donate highly appreciated stock, rather than cash, to a qualified not-for-profit organization. But if you just can’t part with that winning stock, there’s another way to avoid paying tax on the embedded capital gain: Give the appreciated stock to the not-for-profit and then buy a new position in the stock.
Here’s an example of how the strategy worked for a couple who asked us for a better way to help their local hospital than writing it a check for $100,000, as they had done in previous years.
Their advisor first suggested giving the hospital their $100,000 position in a pharmaceutical stock that they had bought six years earlier for $15,000. That would help the hospital just as much, reduce the risk from holding a concentrated position in the stock, and provide them with a bigger tax break by avoiding $26,000 in income tax on the $85,000 capital gain,* as well as a charitable deduction for the contribution.
But the couple was reluctant to part with something that had performed so well and that they felt complemented their large, diversified portfolio. So, their advisor suggested that, instead, they give the stock to the not-for-profit, and buy a new $100,000 position in the same stock, using the cash they had accumulated to give to the hospital. The strategy would still fulfill their charitable goal, they would receive the same $100,000 charitable income-tax deduction, and they would reset the cost basis of their position in the stock to $100,000.
That’s what they ultimately decided to do. If at some point in the future they decide to sell the stock, they would avoid realizing $85,000 in embedded capital gains—and paying $26,000 in capital-gains taxes.
*This analysis assumes the gain would otherwise be taxed at a blended long-term capital-gains rate of 30.2%, based on a federal rate of 20% with the 3.8% Medicare surtax and a combined state and local tax rate for New York City of 12.7%.
The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.