There’s a chill in the air, and peppermint candles, coffee, and cookies are beginning to replace all things pumpkin spice. This is a telltale sign that it’s time to start thinking about the holiday season.
There are so many special holiday traditions—decorating the tree, lighting the menorah, watching It’s a Wonderful Life with family … and putting money aside for charitable giving. Nothing compares with the simple joy of giving (except perhaps maximizing tax efficiency when you give).
While I can’t offer advice on how to maximize your dollars when shopping for the holidays, I can offer guidance on gifting appreciated shares—allowing you to reduce your taxes and perhaps even rebalance your portfolio, all while helping a worthy cause.
Gifting appreciated securities
An “appreciated security” is an investment, such as a mutual fund or an ETF (exchange-traded fund), that’s worth more today than when it was purchased. Securities you’ve owned for more than 1 year can be gifted directly to a charity (if the charity is equipped to handle this type of gift). Gifting appreciated securities allows you to claim a tax deduction for the full fair market value of the securities without owing any capital gains tax on the sale. A donor-advised fund, such as Vanguard Charitable, can handle donations of appreciated securities, which can then be granted to charities immediately or in the future.
Here’s an example of how it works. Say you invested $10,000 in a stock mutual fund in 2015. Since then, your investment increased in value and is now worth $12,500. If you donate the appreciated securities to a charity, the charity will receive the full value of your gift ($12,500), and you won’t pay capital gains taxes on the $2,500 gain.
However, if you sold the fund with the intention of making a cash gift to a charity, the amount of your withdrawal would be subject to federal income taxes. While the charity would still get your gift of $12,500, you would end up paying $500 in taxes ($2,500 in capital gains multiplied by the 20% long-term capital gains tax). Donating appreciated securities allows you to give a generous gift in the most tax-efficient manner.
Timing your gift
While it may be smart to wait and purchase a holiday gift on Black Friday or Cyber Monday, timing a donation of appreciated securities isn’t as simple.
There are 2 ways investors tend to think about donating securities after long-term solid market performance. On one hand, the market may keep going up and your investment may continue to grow, so maybe you should wait. On the other hand, every bull market is followed by a bear market, so maybe you should make your move now to avoid the risk of your investment dropping in value.
Unfortunately, there’s no way to predict future market performance. Whichever way you approach the timing of donating securities, there’s always a chance you’ll make the wrong call. My advice is to avoid any attempt to time the market. If you’re looking for a way to determine the right time to donate appreciated securities, consider gifting them when you rebalance your portfolio.
When you rebalance, you buy and sell securities in your portfolio to realign your current asset allocation with your target allocation. (Vanguard generally recommends rebalancing your portfolio when your asset allocation has drifted by 5% or more from your target.)
Rather than selling appreciated securities to rebalance your portfolio, consider donating them to a donor-advised fund or a charity. Since the appreciated securities won’t be subject to capital gains tax, you can rebalance tax-effectively while supporting your favorite charity―a win-win-win!
Using a donor-advised fund
Gifting appreciated securities is more complex than contributing cash. While some large nonprofits may have the capability to easily handle appreciated securities, smaller organizations may not.
Many charitably inclined investors use a donor-advised fund, such as Vanguard Charitable, to gift appreciated securities. In fact, 58% of the total contributions to Vanguard Charitable over the last 5 years were appreciated securities. Donating securities to a donor-advised fund can allow you to make 1 donation and earmark the proceeds for 1 or more charities. Using a donor-advised fund can also allow you to capture the benefit of strong market performance today so you can make a grant in the future.
Giving smart (and from the heart)
During this season of kindness, year-end tax planning, and all things peppermint, I like to focus on the simple joy of giving—and I know Vanguard Charitable donors do too. As you’re putting money aside for charitable giving, consider donating appreciated securities … and gaining a tax benefit from your generosity.
All investing is subject to risk, including the possible loss of the money you invest.